The GoP's announcement to divest 2.5% of its share
holding, with an equal 'green-shoe' option, in Oil & Gas
Development Company (OGDC) offers retail investors, investment bankers
and fund managers to strengthen their investment portfolio. The GoP
has already announced sale of 51% shares of its total stake in the
company, along with the transfer of management control.
Privatization of OGDC is an important transaction
for which investors have been waiting for a long time. Analysts
strongly believe that this transaction may materialize swiftly and
smoothly provided the GoP follows a clearly laid-down policy and
adheres to the schedule. The transaction can serve two key objectives.
Firstly, the OGDC's privatization can help in earning strong proceeds,
with a large chunk in foreign exchange, for Pakistan due to company's
strategic oil and gas reserves. Secondly, the new management is likely
to add real value to OGDC's existing corporate expertise.
If one compares OGDC with other exploration and
production companies worldwide, it is amongst the leading
international oil and gas exploration companies in terms of its
reserves base. According to reports, Pakistan has over 300 million
barrel crude oil and about 27 trillion cubic feet (TCF) gas reserves.
The OGDC holds the largest share of these reserves, 50% of total oil
and 37% of total gas. The remaining recoverable reserves of the
company, as of January 2003, are over 10 TCF of gas 145 million
barrels of oil.
The OGDC, wholly-owned by the GoP, was established
in 1961 for the exploration and development of oil and gas reservoirs
in the country. It was converted into a public limited company in
October 1997. Since its inception to May 2003, the company has drilled
176 exploratory wells and 279 development wells. Additionally, OGDC
has discovered 44 gas fields with a success ratio of 1:3 in
exploration. It also has one subsidiary company, Pirkoh Gas Company
principally involved in the development in the Pirkoh gas field
located in Balochistan.
The OGDC pertains to the sector that is the top
priority of the GoP due to importance of oil and gas in the economy of
the country and being the important source of foreign investment. Some
of the globally known exploration companies are already working in
Pakistan. The contribution from foreign operators draws a positive
picture for OGDC in terms of technological support. At present OGDC is
operating in conjunction with these firms at various projects under
the joint venture agreements. This can be gauged from the fact that at
present OGDC has 32 joint venture contracts, most of which are with
multinationals operating in Pakistan, these include Tullow, BP, Lasmo,
OMV and OPI.
Currently (as of May 31, 2003) OGDC produces, at an
average, 22,334 barrels of oil, 823 MMCFD of gas, 126 tonnes of LPG
and 23 tonnes of sulphur per day. OGDC has made nine discoveries from
March 2001 to date. These include eight in Sindh and one in NWFP. In
addition to this, the completion of the projects in progress are
likely to add another 500 MMCFD of gas and 9,000 barrels of oil to the
company's resource base within a year's time. Recently the GoP has
approved a Revised Development Project for the OGDC that envisages a
contract for drilling 41 exploratory wells at a total cost of Rs 11.8
Therefore, it may not be wrong to say that OGDC is
a high growth stock having a decent upside potential. The company's
production levels are expected to rise due to the additional
discoveries. The improved production levels would facilitate in
balancing the country's demand and supply of oil and gas resources.
Some of the projects being actively pursued are 1)
expansion of Qadirpur gas field, 2)
Dakhni plant expansion, 3) Chanda
field (first discovery in NWFP), 4)
Dhodak plant enhancement and 5)
A closer look at the revenues shows that OGDC earns
around 93% of its total revenue from crude oil and gas sales. Natural
gas alone comprised of two-third of total gross sales during year
2002-03. Besides, crude oil and gas the company generates revenue from
sale of LPG, Naphtha and kerosene oil, contributing the remaining 7%
to the total gross sales.
The company has shown a decent profitability trend
over the last five years, earning at an average 23% on its equity. For
the year 2002-03 the reduced general and administration expenses, a
significant decline in financial charges and the improved figure for
other income helped the company in posting substantial profit margin
for the year.
The OGDC divestment plan offers tremendous
prospects to investors in the form of both dividends and capital
gains. The strong fundamentals enjoyed by the company decipher into a
price range of Rs 250-300 per share. Assuming, if the GoP offers OGDC
shares at Rs 50 per share it would by at an 80% discount to its fair
value. It would also contribute to the market depth offering investors
a long-term investment option.