Oil and Gas Development Company Limited (OGDC) Earnings Call Transcript & Summary

Good day, and welcome to the OGDCL Half Year FY 2021 Financial Results Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Subhani, CEO. Please go ahead.

So this is Khalid Subhani here. I would like to welcome you all. First of all, good morning or good evening, depending where you are in the world. And welcome to our half yearly financial results announcement. I understand that our Investor Relations team has already sent you the presentation on our half yearly results and you might have gotten a chance to go through it. So now I'll pass it on to our CFO, Mr. Anas. He'll take you through the results, and then we'll take the questions, whatever questions you may have.

Good morning and good afternoon, ladies and gentlemen. This is Anas Farook, CFO of OGDCL. I am hoping that you have just read the disclaimer with this presentation, and you've gone through the important points of that obviously. So moving on and understanding that you've already done that, let me just give you brief highlights of what exactly OGDCL did in this half year ending 31st December 2021. We are the biggest upstream player in Pakistan and we enjoy a huge exploration acreage, which is the largest in the country, by a long margin as compared to our competitors, which is approximately 41% of the total area awarded. The OGDCL holds 43% of the country's recoverable reserves and 36% of the country's gas reserves. In terms of production, OGDCL delivers approximately 29% of Pakistan's gas output and 48% of its oil output. As far as reserves go, as of 31st December 2021, we have 677 million barrels of oil equivalent as of 31st December. We have 111 development and production leases and 77 of these leases are 100% owned and operated by OGDCL, while 34 are nonoperated D&P leases, which is development and production leases, where we are nonoperators and we have joint ventures with various local and foreign E&P partners. As I said, our operations are throughout the country. During the half year period, OGDCL has reported an average daily net crude oil production of 36,788 barrels, gas stands at 827 million scfs and LPG at 814 million tons per day. We have also spud 6 wells, which comprise of 4 exploratory wells and 2 development wells. And we've also made 4 new hydrocarbon discoveries during the 6-month period. Moving on to the next slide. This clearly shows you a map of Pakistan and also highlights OGDCL's dominant position as far as oil and gas and E&P activities are concerned. We hold a diverse portfolio of exploration assets, which are 50 in number, which are owned and operated joint ventures. We have 9 blocks which are operated by other E&P companies. And these licenses are spread throughout the country and all the provinces of Pakistan. I will move on to the next slide now, which basically gives you a financial highlight of the half year. We registered a sales revenue of PKR 151 billion as compared to PKR 110 billion last year. These are primarily attributable to higher oil prices. It is important to note that our production as far as oil, gas and LPG is concerned, despite the natural decline, we have managed to keep it at approximately the same levels as last year, same half. The company's average realized prices were approximately $63.23 per barrel as compared to $38.81 per barrel same period last year. And we also saw a slight increase in the gas prices, which moved up from PKR 377 last year to PKR 404 in the current year. Our LPG prices have also shown a substantial increase. We have actually sold LPG at PKR 113,962 per ton as compared to PKR 62,826 per ton. Further, actually exchange rate depreciation also contributed significantly to our results in the first half, where our average exchange rate was PKR 169.98. Our operating and net profit margins are 55% and 46% respectively, and we have achieved an EPS of PKR of 16.02. The Board of Directors had the meeting today and they have proposed a second interim payment cash dividend of PKR 2 per share. I'll hand over the presentation to our Head of Exploration, Mr. Tariq Mahmood, who will run you through the brief highlights of our exploration program this half.

Good day, ladies and gentlemen. This is Tariq Mahmood. I'm Head of Exploration Department. I will be taking you through Slide #6. With OGDCL being the market leader in E&P sector of Pakistan over the largest exploration acreage, which as of 31st December 2021 stood at 91,795 square kilometers, representing 41% of the country's total area under exploration. The company's exploration portfolio currently comprises 50 owned and operated joint venture exploration licenses. Additionally, the company possesses further interest in 9 exploration blocks operated by other E&P companies. In order to discover oil and gas reserves, OGDCL, during the period under review, acquired 652 Line kilometers of 2D with low 2D seismic data acquisition in comparison to 1,715 Line kilometers of 2D and 156 square kilometer of 3D seismic data acquisition during the corresponding period last year. The acquired seismic data represents 59% of the total 2D seismic data acquisition in the country. On the drilling front, OGDCL spud 6 wells, including 4 exploratory wells, that is Bago Phulpoto-1, Bewato-1, Killi Malik-1 and Kalerishum-1, and 2 development wells Hakeem Daho-3 and Qadirpur 63. Moreover, drilling and testing of 9 wells pertaining to previous fiscal year was also completed. OGDCL's exploratory efforts to locate reserves yielded 4 oil and gas discoveries, having expected cumulative daily production potential of 39 MMcf of gas and 2,850 barrels of oil. Aforementioned discoveries include Wali-1 (Kawagarh), Wali-1 (Hangu) and Wali-1 (Lockhart) formation in district FR Lakki, Khyber Pakhtunkhwa Province and Jandran West-1 in district Kohlu, Balochistan Province. Now Mr. Jahangaiz Khan, Head of Production, will take you through the next couple of slides.

Hello, everyone. This is Jahangaiz Khan, and I am the Head of Production Directorate. Let's move on to Slide 7. OGDCL witnessed increase in its crude oil and LPG production in comparison to the corresponding period last year. The company's average daily net crude oil production clocked in at 36,788 barrels as compared to last year 36,423 barrels per day. On account of increased production predominantly from Pasakhi wells, Kunnar, Mela, Tando Alam and Mangrio fields. Likewise, average daily net LPG production clocked in at 814 tons per day as compared to 778 metric tons per day, owing to higher production mainly from our Mela, Nashpa and TAY fields. OGDCL's average net saleable gas production clocked in at 827 million cubic feet as compared to 856 million per day. Decrease in gas production is primarily due to natural decline at KPD-TAY and Qadirpur fields. Moreover, production decline was regarded owing to annual turnarounds at 5 production fields, which include Qadirpur, Mela, Nashpa, Sinjhoro, and Uch. OGDCL, during the period under review, injected 7 operated wells in the production gathering system. These injected wells include Tando Alam-21, Sial-1, Pasakhi-12, Mangrio-2, Togh Bala-2, Gundanwari-1 and Pandhi-1, which cumulatively yielded gross crude oil and gas production of 171,110 barrels and 833 billion gas, respectively. In an effort to arrest natural decline and to sustain production from mature wells, OGDCL, during the period under review, carried out 52 workover jobs, which comprise 9 with rigs and 43 rigless. Overall, the company contributed around 47%, 28% and 36% towards country's total oil, natural gas, and LPG production respectively. Going over to Slide 8, where latest status on various development projects is given. I will explain briefly. The one is Qadirpur Compression. There the installation of first compressor has been completed and compressor is in operational mode, and second and third compression are in installation phase and hopefully, we will complete [Foreign Language] next month. Next is Maru-Reti Compression, where compressor has been delivered at project site, while hiring of PC contractor for installation is in progress. Third one is Daru-Mangrio Central Facility LPG Extraction. The case for this project for hiring of contractor for installation of plant is in already first standard. The next is Dakhni Compression. For this project, bids for hiring of EPCC contractor have been received and evaluation is in progress. The next one is KPD-TAY Compression, where conceptual study and front-end engineering design work have been completed and press tendering is in progress. The next is Uch Compression. Tender for hiring of EPCC contractor has been floated in the press. And last week, we received bids and it's under technical assessment. Thank you very much. And now I ask Anas Farook, our CFO, to continue with the presentation.

Ladies and gents, moving on. I'll briefly -- I mean, obviously, you've seen the results and I'll briefly tell you what basically drove our results higher. Primarily, you would see that our revenues were increased 36% due to increase in prices, especially of oil. Our volume remained quite constant for all 3 commodities, which we run. And obviously, a slight increase in our rupee-dollar parity also helped us increase our revenue. There was only a very minor increase in our operating expenses and the other increase basically was in our exploration and prospecting expenditure where we had 2 dried wells. And one of them, which was Seni Gumbat one was approximately 2.9 billion as compared to 3 wells, which were relatively smaller wells, which were dry in the corresponding period. And that basically resulted in our increase in net profit after tax by 63%. On the next slide, we have given you a brief of our indicators or financial highlights, which we've achieved, comparing the quarters and the half years. And we will take the questions afterwards. I'll just ask Mr. Khalid Subhani to close the presentation and then we'll be able to take your questions.

Okay. Just a few words from me. Me and my team, we are fully focused on achieving the consistent growth in production and volumes of the company because, obviously, that's bread and butter for us also. We are fully committed to ensure the speedy development of our projects which are in the pipeline and trying our best to shorten the time line wherever possible. We also plan to achieve the production and reserve growth through implementing international best practices across all our operations. So ladies and gentlemen, this concludes our presentation for today. I hope you've got a good flavor of first half of this year. And we are really looking forward to close this year with similar or better results. We now ask the operator to conduct a question-and-answer session, which we expect not to be more than 20 minutes or so. So thank you.

[Operator Instructions] We'll go first to Aftab Awan with Akseer Research.

This is Aftab Awan from Akseer Research. My question would be regarding the circular debt. Can you provide some update on it? Because I've seen that your overdue receivables have reached around PKR 352 billion. So what's the current update on it? How to resolve it? And are you guys in negotiation with the government to resolve this amount?

Yes. Let me just take that question, Aftab. Thank you very much. It's a very pertinent question. The response to that question is, yes, we are working with the government to resolve this issue. Obviously, this is a very, very pertinent issue, which is being discussed at all levels of the government. And our company is very, very deeply involved with all the stakeholders in the government to resolve this issue. And we hope that something very, very positive will come out of these discussions because we have got some very good feedback from the finance ministry on this part.

Okay. Sir, I have 2 follow-up questions. First, government has passed a bill in parliament regarding weighted average cost of gas. So as I believe that this would improve the recovery rate of gas sales, which local E&Ps do, especially OGDCL and PPL. My question would be, how long it would take for this thing to reflect on your cash flows? I mean, in a year or 2 years, maybe? And the other question would be that government was in negotiation with OGDCL and PPL for settlement of past due receivables around PKR 400 billion in form of dividends. Actually, government was saying that OGDCL and PPL pay higher dividends and settle the amount against government receivables. So where is that thing going on? What's the update on that?

So answering your first question, which was about WACOG. And you rightly pointed out that this has been passed in the National Assembly. And when it's going to affect our cash flows? Obviously, this will be a prospective change in our collection and hopefully for the better. As to how prospective will it be implemented is something which the government needs to provide. If they increase the price tomorrow, you would start seeing a change in the recovery pattern very, very soon, maybe in the next 6 months. But that primarily is a government policy as to when they physically or practically implement WACOG in its spirit. And obviously, OGRA will be very keenly involved in that along with the Sui Company. So yes, rightly said, it will better our cash flows. But I cannot give you a time scale as to when it's going to start affecting, but we're hoping very soon. And as far as your second question is concerned about the government talking about PKR 400 billion of circular debt being settled through dividends. As I said, there are various points of discussion which we are having with Ministry of Finance. Those discussions are not finalized as yet. Once they are finalized, then I'll be able to basically respond to your this particular question. But obviously, we'll look at all the angles as to how and do the best for the company as far as this particular thing is concerned.

We go Next to Asim Khatri with NBP Funds.

My question was pertaining to the hot issue that is circular debt. As it has been discussed that government is planning or offering settlement of circular debt, the mechanism that is being considered is that it would be something similar to the IPPs that some short-term instrument will be issued in favor of [indiscernible] their tariff differential and be paid on to OGDCL and PPL and then they can give out dividend. So as far as this particular proposal or process is concerned, I just wanted to get the word of OGDCL, what they think of this proposal? Is it implementable? And what sort of regulatory or technical hurdles can come if [indiscernible]?

As I said, we haven't received anything as such which is concrete on this particular proposal. We will only be able to assess the implication, both regulatory obviously and the compliance issues, the governance issues as far as the proposals have been sent. Once we receive those proposals officially, obviously, you should be aware that we will follow the guidelines of all the relevant regulators at the maximum and we will ensure that it complies with whatever we do or the government requests us. We will ensure that it complies with all the regulatory requirements.

This is Khalid Subhani here. Just to add to what Anas said, circular debt is a much bigger issue. It's not one company's issue, its country's issue right now. And as you pointed out, there are a number of ideas and proposals and thoughts which are being considered by the government. All companies who are sort of part of this debt as well as the ministries and the government is working very hard and are very keen to resolve the issue or at least kind of bring it down to a level possible. So in doing that, there are a lot of ideas and proposals in the works right now. Nothing is concrete. And until and unless something comes to us in writing from the government to look at it, only then we will be able to comment on it. Otherwise, there are a lot of proposals in think air that we would not like to comment on.

Right, right. And I just wanted to get an idea, if suppose such a proposal is moved, I just wanted to get, are there any restrictions in terms of regulations that -- this process of movement of cash, will there be any restrictions on it or another legal angle that would [indiscernible] on this, or as far as OGDCL is concerned, this is a possible workable situation?

I can't comment on it until and unless I see all the details. And as you know, they say devil is in details. And we have to have those details to examinate from all the angles that you are pointing out. So it's really premature for me to say whether it's acceptable, whether legally it is fine or not until and unless we get the proposal and get to see in there in terms of detail.

Right, right. And my second question pertains to the international investment that the 4 oil and gas companies of Pakistan have made in ADNOC block. So can you brief some time lines, what are the expected dates of the completion of seismic studies and then eventual target of drilling of wells, and can you give us the time line?

Yes. This is Anas here again. I mean, you know that the block was awarded in August 2021. So it is pretty early in the game for this to tell you what wells and what not because there's a whole seismic program which has to be done. ADNOC is doing the seismic program and they have just completed the initial studies. We are looking at the data. And once we have looked at the data, then only we can see the prospectivity and determine how many wells we will do with sector, et cetera. So this is a process which will take a year or 2 to basically analyze and finalize. And then only we can look at what sort of wells. But we are very hopeful that it is a very good investment.

But as of now, everything is going as per plan. We are making very good progress. The partners are with us, and so far, so good. But obviously, it's a little premature right now to answer specifically the question that you asked unless the information come in, and that will take some time.

Right. So just to get an understanding that it will take 1 to 2 years for the seismic study to be completed and then...

See, seismic has been completed. Obviously, the interpretation, et cetera, has to be done. We are trying to expedite everything. I mean this is just a ballpark sort of a thing, which I just mentioned. It could be done earlier. Most likely, it will be done earlier than that. And as I said, I mean, we are very hopeful in the sense there are already a couple of discoveries there, which have been around for some time in that area, which we have been awarded. So we feel that's a very win-win situation as far as we are concerned. And we are hoping that we will get good leads in the 3D seismic, which has been done.

We go next to [ Wazir Razzaq ] with JS Global.

I just have a couple of follow-up questions. First one regarding the circular debt settlement. You guys currently have TFCs and accrued TFCs as well rather than interest on TFCs, which is actually a part of the entire portion of circular debt. So I mean if you have talks with the government and Ministry of Finance on this front, can you just highlight that is this inclusive of that kind of a settlement? Or will there be a different form of settlement for these TFCs?

See, circular debt includes all elements of whether it's TFCs or through customer recoveries or through giving subsidies to the Sui companies, et cetera. So all elements are included in our discussion.

Right. Just 1 follow-up question on Pakistan International Oil Limited. As per your financials, you have invested up to PKR 1.8 billion. And just wanted to know if this is the entire amount of capital outlay by your company? And what is the expected ROE from this project? And what is the expected amount of flows that the company is currently expecting or for prospecting for at the moment?

So you asked 3 questions in a single question, let me answer that 1 by 1. So as far as this particular investment is concerned, as you would be aware that we had -- once we got this block, we had -- in our last investors meeting also we said that we have approvals of PKR 400 million -- $400 million to be invested in this project from the government, all 4 entities combined. So OGDCL's share is PKR 100 million (sic) [ $100 million ]. And as I also mentioned that this is just the seismic part. So obviously, there is some capital expenditure to come because we have to drill wells, et cetera. So no, this is not -- this is just the starting of our capital expenditure. As far as the reserves and the ROEs are concerned, obviously that will depend on when we drill the well and what sort of flows we see. So that I cannot answer right now. It's a bit premature for me to answer that question. We are hopeful, as I said in the past also, and there have been some discoveries in the past in that area. And we are looking on the positive as far as getting incremental revenues and production from PIOL.

So just circling back a little. You just mentioned that $100 million is just a part of your seismic activity. So if I were to just corroborate the same number, if an adjoining or a nearby oil well which is being drilled offshore, I mean, can you draw down some comparisons where, for example, a well would be spud for about 10 million barrels of oil and what were the cost for it and the kind of scale of cost that can be involved in this regard?

See, first of all, let me correct you as far as seismic is concerned. I did not say that the seismic is for $100 million. I said the whole share of the project as far as we are concerned, which was approved by the government is $400 million, which is divided equally between 4 partners. So that is $100 million for OGDCL only, not only seismic, but all the activities. As far as you drawing conclusions as far as nearby wells of offshore, which are concerned. Again, on the fact that what sort of CapEx are we looking at. See, it depends on a lot of factors, which are currently unknown. As you would know that wells in Pakistan also depend on the meterage and where the spots are or the sweet spots are. So this is only going to be analyzed or finalized once we have some data analyzed. And then only can we figure out if a well will cost you $1 million or $100 million or $10 million. So that is purely dependent on what sort of structure and how deep the structure we see coming out of our analysis of our seismic acquisition. And it can vary from one area to the other by the way.

Okay. Great. So as per your books, you still have about $330 million in your foreign currency TDRs. Did you realize a few of it from your TDR deposits in the last quarter? Like, I mean, in terms of investing into different prospecting projects.

Prospecting projects means, obviously, we had our investment in PIOL, as you would see from our financials, of $25 million, which we paid as our contribution for PIOL work program as of now. And that's where we transferred out our dollars which we had on our balance sheet.

So next is Saad Ali with IMS.

Sir, I know a lot of questions have been asked on Pakistan International Oil Limited. But just 1 more from my end. From the accounts, we can see that about PKR 2.4 billion or so of share of loss was booked in this quarter. I just want to understand if this is recurring? You just mentioned that $25 million of investment was made into the work program. Is that part of the work program complete? I'm presuming it's related to the seismic surveys. So yes, just some sense on whether this is recurring for future or coming quarters?

Yes. So this, as you would know, the account, this particular investment, which we did initially in the first quarter, has been utilized, as I said, for the seismic acquisition, which was done. And as per the accounting standards, we are required to expense out seismic. So it cannot be capitalized. So that's why it shows a loss. But obviously, once we start going into a program, which in any E&P company, once we go into a program, you have seismic as an expenditure and then obviously move into the prospecting development and exploration phase where we start capitalizing depending on the prospectivity of the well. So yes, the initial expenditure only pertains to the seismic.

Okay. And should we understand that the future quarters may not have this expense recurring? Or to have something less than that?

Something way lesser than that.

Okay. Okay. Sir, just another question. What is the CapEx plan for this year aside from PIOL in domestic drilling and other activities?

See, we are looking at somewhere in the range of -- so obviously, there are wells and there are some compression projects, as Mr. Jahangaiz had mentioned, which are ongoing. I would look at a range of approximately $25 billion -- PKR 25 billion, sorry.

PKR 25 billion?

PKR 25 billion.

Sir, just 1 last question from my end. Oil prices at $100 per barrel, that significantly improves the economics of a lot of wells, higher risk wells in particular, including offshore, I suppose. Any thinking on that front, that perhaps some projects which were held back in recent past, OGDC or its partners may perhaps expedite those projects?

See, there are various avenues which we are looking at as far as drilling is concerned. As you would see that we are going in very high-risk areas and our discovery of Wali, which is one of the biggest discoveries which we've had in the past 10 years, was in a high-risk area. So we feel that there are prospects which are available onshore. And we are looking at those prospects as of now. As far as offshore is concerned, we are already involved in PIOL in the offshore business. So as far as Pakistan is concerned, I don't see it in the next 6 months. The oil prices will have to stabilize. Obviously, it depends on a lot of global factors. We are watching the oil prices and we'll see how it goes.

We'll go next to [ Ahmad Javed with Maple Capital Limited ].

Sir, I just have 1 question pertaining to Wali block. Sir, when is the earliest time period you can expect production to commence from Wali block? And just another question, sir, can you specify what is the exact size of the reserves available in that block? Is it larger than Nashpa?

Yes. So we have obviously -- I mean, as you mentioned rightly, we have discovered Wali. And Wali, we have hit 3 formations on that. And we are seeing approximately 21 million standard tank barrels of condensate and 291 billion scfs of gas in those 3 formations of the same well. We will have to further drill some other wells to basically assess the whole area to see what sort of total reserves we are looking at. This is being done as we speak. We will be going to Wali very soon again and drilling another well there -- 2 wells in Wali very soon. That will give us a much better idea of the reservoir size. As far as commercialization of that is concerned, we are looking at all options. All options are open in this and our operations team is working very hard to basically make sure that we start the process of commercialization of that gas. The good thing about that is, as I said, it's the biggest discovery which has happened in OGDCL, and for that matter in Pakistan E&P industry in the past 10 years. That itself increases our reserve replacement ratio by a significant amount. Okay. Are there any further questions?

We do have 1 question from Asim Khatri with NBP Funds.

Yes, I have a question on Wali-1. Can you share some sort of a time line on Wali-1. When should we expect the [indiscernible] from it? I understand that it might be too early to say, but if you just can give us some sense of an idea of the CapEx required and the time line regarding the pipelines that have to be laid and the connection time that would be [indiscernible] are successful?

You asked some interesting questions. I'll hand it over to Mr. Jahangaiz, who's our operations head. He'll answer that question.

Basically, we have succeeded in discovery of Wali-1, which is the only 1 well. And on the basis of this single well, we can't predict the true potential of the field. This year, within 2, 3 months, we are planning to drill further wells, 2 or 3 more wells. And we will have some good information regarding the total available potential from the Wali block. So as long as the long-term development of the field is concerned, it may take 2 to 3 years to bring it on production and to increase the cash flows for the company. But on the parallel, we are working with the gas company, SNGPL, to lay pipeline, which is about 60 kilometer line and we are negotiating with them. And if they succeed and if they agree to lay the line, then we can bring this 1 well on production within 1 year time; or the time they will take for laying the pipeline, simultaneously, we will arrange some processing facilities for the interim period just to make the gas available to the national grid. So it may take 1 year as an interim arrangement. For the long run, we have to drill more wells and then we will make a field development plan and we will install the proper processing facilities, because the gas is having 4.2% CO2 concentration, which is on the higher side as compared to the normal spec, which is 3%. So I will conclude that for the long term, it may take 3 years, and for the short term, if SNGPL succeeds or agrees to lay the pipeline, we can bring this well into production within a year, [Foreign Language].

If there are no further questions, we would like to thank all the participants for being part of this conference call. Thank you.

This does conclude today's conference. We thank you for your participation.