The ultimate privatization can help the GoP in earning strong proceeds with a large chunk in foreign exchange

Oct 20 - 26, 2003

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 billion.

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) Bobi development.

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.