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

Hello, and welcome to the OGDCL Half Year Financial Results Conference Call. My name is Saska, and I will be your coordinator for today's event. Please note, this call is being recorded. [Operator Instructions] I will now hand you over to your host, CEO, Ahmed Hayat Lak, to begin today's conference. Please go ahead.

Thank you. Ladies and gentlemen, this is Ahmed Lak. I welcome you all to OGDCL's half year financial year '23/'24 financial results announcement conference call. I understand that our Investor Relations team has already sent you presentation on OGDCL's half year results. We have with us today, our CFO, our Head of Exploration, our Head of Production and Head of Services to answer your questions as well as brief you about the company's half yearly performance. As part of the typical housekeeping, I would like you to go through the legal disclaimer, which is part of our presentation. And I'll just take a short pause to enable you to go through the legal disclaimer. I would now request the company's -- the CFO, to take you through the financial results of the company for the half year. Over to the CFO, please. Thank you.

Thank you. Good evening, ladies and gentlemen. You must have gone through the slides, which have been submitted by our Investor Relations department. Let me run you through a little bit of the financial operational overview. As you know, we have the largest exploration acreage in Pakistan, which accounts for approximately 38% of the acreage under exploration. Our portfolio comprises of 42% of oil and 36% of gas as far as Pakistan's total reserves are concerned. And we are, by far, the largest player in the E&P industry in Pakistan, owning approximately 46%, 28%, 37% in crude, gas and LPG, respectively. Reserves. Our reserves on a 1P basis are, which currently stand at 389.8 MMBOE. And on a 2P basis, at 719.5 MMBOE. We have currently 77 operated leases, and we have 33 non-operated leases. Our daily net sellable crude oil, gas and LPG production for the first half clocked at 32,984 barrels per day, 716 million Mcf per day and 724 tons per day, respectively. During the first half, we spud 5 wells and we have 2 gas condensate discoveries during the first half. Moving on. We have -- as I mentioned, that we have a very diverse portfolio, and we operate in all the 4 provinces of the country. We have 50 owned and operated joint venture exploration licenses in the exploration domain. And we have interest in 11 blocks, which are operated by other E&P companies. On the financial side, we clocked sales revenue for our first half at PKR 235 million as compared to PKR 203 million in the same half last year. These higher sales are primarily attributable to foreign exchange rate -- foreign exchange variances, which are partially offset by an unfavorable crude oil price. Our realized prices of crude oil, gas and LPG were $69.78 per barrel, PKR 711.87 million cf and PKR 155,000 per ton for LPG. The prices obviously have declined in this half as compared to last year, the same half. Average exchange rate has been higher at PKR 287.5 whereas in the first half of last year, it was PKR 223. Our operating profit margin and net profit margin were 53% and 52%, respectively. And our EPS was -- stood at PKR 28.67 for the half year. The Directors, as you would already know, have announced an interim dividend of PKR 2.5, which is in addition to the previously announced dividend of PKR 1.6, which makes a total dividend for the first half at PKR 4.1. I will now hand it over to Mr. Farrukh Saghir, who is our Exploration Director, will run you through exploration update.

Good day, ladies and gentlemen. This is Farrukh Saghir. I'm the Head of Exploration Director, and I'll be taking you through Slide #6. OGDCL being the national flagship of Pakistan E&P sector holds the largest exploration acreage, which as of 31st December, 2023, stood at around 91,781 square kilometers, presenting 38% of country total area under exploration. The company's exploration portfolio currently comprises of 50 owned and operated joint venture exploration licenses. Additionally, the company possesses working on present 11 exploration blocks operated by other E&P companies. In line with this exploration growth strategy to locate oil and gas reserves, OGDCL during the half year acquired 652 line kilometers of 2D and 262 square kilometer of 3D data in comparison to last year of 635 line kilometer of 2D and 390 square kilometer of 3D seismic last year. The acquired seismic data represents about 45% and 88% of total 2D and 3D seismic data acquisition in the country, respectively. Moreover, the company using its in-house resources processed and reprocessed about 3,809 line kilometers of 2D seismic data, furthermore, we did 200 line kilometers of geological field work in Nowshera block. On the drilling front, OGDCL spud 5 wells, including 2 exploratory wells, which are Kharo-1, Khewari EL, Bettani Deep 1 in Wali EL; and 3 development wells, Togh-02 in Togh D&PL, Sono-9 in Sono D&PL, and Kunar West-3 in Kunar mining lease. OGDCL exploratory efforts to look at new reserves during the half year reserve yielded 2 gas/gas condensate discoveries, namely Chak-214 in Dunghan/Sui Main Limestone SML and in Mari East EL in district Rahim Yar Khan, Punjab province, and Dars West-2 -- Dars West-2 D&PL in district Tando Allah Yar, Sindh province, having an expected cumulative daily production potential of 360 barrels of oil and 11 million of gas per day. Now I will request Mr. Mumtaz Soomro, Head of Production to take you through.

Hello, ladies and gentlemen. I'm Mumtaz Ali Soomro, Head of Production Director. I will take you to a brief of counter activities and comparison with the last year performance. OGDCL production strategy is aimed at maintaining and augmenting hydrocarbon production and by expanding -- expediting connectivity of newly discovered exploratory, appraisal and development wells in the system, implying production optimization techniques and undertaking or completing ongoing development projects to meet the growing demands of oil and gas in Pakistan. OGDCL's average and daily net crude oil, gas and LPG production clocked in at 32,984 barrels, 716 MMscf and 724 metric tons in comparison to 33,061 barrels, 772 MMscf and 730 metric tons in the comparative period of last year. The company recorded a stable crude oil and LPG production runaway on the back of production optimization efforts and production has started from Bettani Deep. However, natural decline at mature production fields coupled with mechanical issues at Tando Alam-21, Kal-1, and annual turnaround at Chanda, Dakhni, UCH, Qadirpur, and KPD plants was impacted production. The less gas intake by SNGPL from Qadirpur field due to SNGPL system constraints and UPL from rich field due to less demand from power sector resulted in lower gas production. Moreover, reduction in production from NJV fields also contributed towards lower hydrocarbon output. The decline in production was partially mitigated by injecting 4 number of operated wells in the production gathering system. These are Nim East-1, Nashpa-11 and Suleiman Well #1 and Well #2, which cumulatively yielded gross crude gas production of 13,097 barrels and 579 MMscf respectively. In an effort to arrest natural decline and sustain production from mature wells, the company carried out 56 work-over jobs, comprising of 7 of our core jobs with rigs and 49 regulated operations. Moreover, to induce improvement in the current well flow parameters, pressure build-up survey jobs were completed at various wells of Dakhni, KPD, UCH and Qadirpur fields. Additionally, electrical submersible pump was successfully installed at Pasahki-11, resulting in incremental oil production of 1,350 barrels per day, through in-house sizement of compression and operational modifications. Six low pressure production wells from KPD field were also injected in December 2023, leading to a daily production realization of 16 million of gas and 150 barrels of condensate and 18 tons of LPG. That was a short brief of our production operations. And I'll now hand over the presentation to Mr. Zia Salahuddin, Head of Services Director to continue with the presentation.

Good day, everyone. This is Zia Salahuddin, Executive Director, Services. I will take you to the slides regarding projects where latest status on our various development projects is given. First of all, Khewari Development project, construction, installation and commissioning activities executed on fast-track basis, and project completed in October 2023, within 6 months as per has scheduled. Jhal Magsi Development project, Economic Coordination Committee has approved marginal gas price for this field, subsequently contract awarded to PC contractor, M/S Gasco on 1st January 2024. Contractor mobilized through the site and construction work is in progress. There are three major compression projects going on. The first one is Dakhni Compression project, contract signed with EPCC contractor on 14th November 2023. Project kickoff meeting held in third week of January 2024. Detail engineering is in progress. Similarly, UCH Compression project, for this project contract also signed with EPCC contract on 9th October 2023. Project kickoff meeting held in fourth week of January 2024. Detail engineering is in progress. KPD-TAY Compression project. The similar way, contract signed with EPCC contractor on 1st of November 2023. For this project, also a kickoff meeting held in January 2024. Detail engineering is in progress. Now I hand over to Mr. Muhammad Farook, our CFO, to continue with the presentation.

Thank you, Zia. On Slide #9, you will see a graphical snapshot of our financial performance. You will see that our sales have gone up by approximately 16%, which is a direct result attributable to the exchange rate -- favorable exchange rate, which is partially offset by the pricing of crude oil. That has resulted in a net increase of 16%. Our operating expenses, as compared to last year, are substantially high by 54%. And the primary reason for that increase is that three of our major fields where we operate have gone beyond the 30-year cycle and an additional 15% of wallet price as per the PCAs are to be paid to the government of Pakistan, which has resulted, increased our operating expenses. Other major contributor, obviously remains, salaries. Our salaries, which has gone up in line with the inflation. The exploration and prospecting expenditure looks that it has gone down, but actually, the exploration expenditure remains stable. But we have not encountered any drivers this half, which makes it a very positive contribution part that we're going towards targets, which are -- which we feel are highly prospective. But we've had no driver this half as we had two drivers in the last half of last year. Our net profit has increased by 30%, which is a direct result of all these factors, plus the fact that we had -- we reversed provision for depletion allowance in our financial statement, as a result -- the direct result of the Supreme Court judgment in favor of the E&P industry. Against that, we are -- OGDCL in line with all other E&P companies has reversed that provision, which lend a strength as far as our EPS is concerned. That's the summary of the overall results. The next page actually shows you all the major key indicators of our financials. I would be happy to take questions afterwards. But I'll hand over the presentation now to the MD, CEO, Mr. Ahmed Hayat Lak for his final conference.

OGDCL's management is entirely dedicated to attaining sustained growth in the company's production volumes, and we have demonstrated this during the first half year. And going forward, we'll be continuing in the same direction. OGDCL is equally dedicated to ensuring the swift development of our projects in the pipeline and Executive Director of Services gave a detailed briefing on the status of U.S. projects, which are on track, and we look forward to their timely completion. Our strategy involves implementing international perspectives all across all our operations to achieve production and reserves growth. There is a dedicated production optimization group, which is currently working in the company and concerted efforts are underway to improve production and optimize it. And going forward, we will see a positive impact of all such activities. This, ladies and gentlemen, concludes our presentation for today, and I thank you all for joining in the conference call. We now ask the operator to conduct a Q&A session, which we expect to be not more than 15 to 20 minutes duration. Thank you.

[Operator Instructions] And our first question comes from Saad Hanif of Ismail Iqbal Securities.

Am I audible to you?

Yes, you are.

My first question is basically, given the recent surge in gas prices, here is a bashing question. Are we seeing a slowdown in the accumulation of the gas circular debt? Or is it stopped growing or what? And has there has been an improvement in recovery post hike? And what is the current figure for the gas circular debt on OGDC's book?

Is that the only question you have?

I have one more question. And could you provide an update on whether the company is considering divesting its stake in Reko Diq or what -- can you give us a view on this?

Okay. Let me just answer the second question first. As of now, we obviously are looking at our investment in Reko Diq and we have not made any commitment or decisions as to what needs to be done on that front. Currently, we are progressing on the financing of the Reko Diq project through international lenders. And there's no plan as such in the coming few months for divestment. The second one is on the gas prices. The gas prices obviously has increased for the end consumers. And that has given us some strength as far as circular debt is concerned. But obviously, that will only start showing in the coming months in -- from February, March onwards because of the collection cycle of the three companies. So we've got a slight increase in our collections as far as the three companies are concerned as compared to last year. And we are expecting further better collections and -- from the three companies. And hopefully, that should address the overall circular debt going forward. As far as the circular debt is concerned for OGDCL for the three companies, we have approximately PKR 250 billion outstanding from -- similar amount outstanding from SNGPL as of December 2023. Does that answer your question, sir?

Yes. Thank you.

And now we're moving on to a question from Abdullah Umer from NBP Funds.

This is Abdullah Umer from NBP Funds. Am I audible?

Yes, you are.

Sir, my first question is pertaining to Abu Dhabi exploration block. What is the current progress on that front? And second question is pertaining to the planned CapEx for the remainder part of the year. If you can share some light on that.

Sure. So on the Abu Dhabi offshore block, which is the PIOL, we have submitted our development plan to the Abu Dhabi Executive Council for review. We are planning to -- we have started engaged a drilling rig for offshore drilling. And we expect to drill 4 wells during the next months, commencing from March onwards. We expect a full approval of our drilling program by the fourth quarter of 2024. And from then on, the activities will gather a little bit more pace as far as PIOL is concerned. With respect to the CapEx, as Mr. Zia just pointed out that we are undergoing a series of compression projects, which will add to our CapEx spend. And the current CapEx spend for this half is approximately PKR 20 billion, and we're looking at spending approximately PKR 30 billion to PKR 35 billion in the next half.

We now move on to our next question, which comes from Ajil Jalal of [indiscernible] Capital.

Am I audible?

Yes, please go ahead.

My question relates to the current selling price of UCH and Qadirpur field. And the second question is during the presentation, you mentioned that three of your fields have gone past the 30-year cycle. And hence, you're incurring additional royalties on those fields. If you could please mention which three fields are those please?

Okay. So what are the current selling prices of UCH and Qadirpur, you said.

Yes.

So Qadirpur remains as per the petroleum policy of which it stand. So there's no change in the prices of Qadirpur as such. And as far as UCH is concerned, UCH is in the range of -- depends on primarily on the HSFO in the market and it ranges, and it basically is linked to that particular price. So it has a very wide range and can go from $3 to $6, $5.8 at the maximum. The other question is the three fields, which I mentioned. These are not only the there fields which are there, but they are the primary fields where we have given that 15% additional well head and those are Qadirpur, Pasakhi, and Pasakhi North.

And now we move on to a question from Iqbal Jawaid from Arif Habib Limited.

Sir, I have a question regarding late payment surcharge on the gas circuit debt. Could you please tell about that? Another question is regarding Bannu West. Can you tell what is the development right now? When will the production commence from Bannu West?

Okay. So the first question -- I mean, what exactly are you trying to ask? Are you asking me what is -- what...

The amount of late payments surcharge.

The amount of late payment surcharge is approximately overall, in the scheme of things, is approximately PKR 300 billion to INR 350 billion.

Is it pertaining to the gas circular debt? Or is it like overall?

It's primary -- it's overall. Primarily, it's the gas and also TFCs. So these are two elements of the circular debt. LPS, but we don't book those LPS and LDs, just for your information, as they are booked on a receipt basis. The other question is as far as Bannu West is concerned. Obviously, Mari is making all its efforts. They are the operators, that Mari is making all its efforts to basically bring Bannu West online as quickly as possible. And we understand that it should be [Foreign Language] we done very, very soon.

And up next, we have Muhammad Ali of AKD Securities.

Muhammad Ali from AKD Securities. I have four questions. I'll go through them quickly. What is the update on Bettani Deep? I understand you've only covered like 5% to 10% of the drilling. What the target was? My second question is the target levels for Nashpa for the next couple of years, because Nashpa has almost halved from 20,000 BPD to 10,000 BPD. So what should be a normalized levels? Next, the KPD and the huge compression projects have been going on for like 2 years. So when are they targeted to be achieved? Because what I understand is they will get 100 MMscf of incremental production. So they are very important. And finally, I see the exploration blocks have been very aggressive with regards to the government, they've awarded 6, 7 blocks to OGDC. So how much time will the petroleum concession or the exploration license will be awarded to them after the bidding?

Let me just answer and just clarify a few things based on some of the comments which you made. Bettani Deep is not delayed. Bettani Deep is on schedule. It's a very difficult well to drill. It's a hilly terrain and mountainous areas. The well itself is supposed to take approximately a year to drill and we are well into the drilling of that well. So it's not delayed as such. And we are basically looking into that particular thing. We expect to finish that well by end of this financial year or early July, August. As far as Nashpa is concerned, the observation is absolutely right, that it has -- the production of oil has declined from its peak to 11,000 barrels per day. But obviously, that is a natural decline, which we -- which is expected out of every field. And we are making all our efforts to make sure that if nothing else, Nashpa remains at this level and there are various production optimization efforts, which are being done to ensure that Nashpa's production remain stable. KPD-TAY is, where KPD-TAY project is concerned, that is again a misunderstanding, which should be cleared. The KPD-TAY Project has had never started. It is going to start now. We have received foreign exchange allocation from the government of Pakistan just recently. And obviously, Mr. Zia mentioned that the project has been awarded. The project is expected to be completed in 18 months from now. So you can expect that particular thing to be completed by next year. And rest assured that we are trying to basically leverage whatever we have and make sure that the project is completed well before time. Last, but not the least, are the exploration licenses. I would request Mr. Farrukh to just respond to that.

So for the exploration licenses, we won, we have signed and we got -- started operations on these blocks we have. The turnaround time for winning the block and signing was pretty quick this time. So we are hoping that we will start activities. We have started in a couple of blocks as well. So things are moving in a fast track.

And our final question today comes from Saqib Hussain of Dawood Hercules Corporation.

My question is regarding the current portion of the long-term investments that was appearing in your accounts in September as well. I believe around PKR 155 billion to PKR 160 billion was pertaining to the TFC, the principal amount plus the accrued interest that was given to OGDC, I think about 10 or 11 years back. Is there any clarity on the clearance of this particular investment?

Overall, in the overall scheme of things, the government is looking at TFCs and the overall settlement of circular debt situation. So we haven't heard anything from the government officially as yet. But from our understanding, it will be part of the overall deal on circular debt.

And we have another question now from Mustafa Mustansir of Taurus Securities.

I have just one question. Could you please explain the reason for a positive charge for the current quarter's results.

Positive. Sorry, come again. Can you just repeat the question?

The taxation charge that we saw in the result today was positive. So if you could just shed some light on it, please?

Sure. So this particular reversal of provision, as I would call it, was as a result of the depletion allowance case, which was won by the industry as a whole, the E&P industry as a whole in the Supreme Court. The Supreme Court announced its judgment on January 8, 2024. And basically, the review period has also expired as per the requirement. So the provision relating to depletion allowance, which is approximately has a PKR 6 impact on the EPS, this half CVS was reversed. So that's why you see a positive as far as taxation is concerned.

And we have a follow-up question from Saad Hanif of Ismail Iqbal Securities.

What are the projected target for drilling wells in the fiscal year 2025? And could you please provide details regarding the CapEx?

'25, you mean the fiscal year '24/'25?

Yes, fiscal year.

It's a bit early to comment on that, Saad, frankly speaking. We are still working on our next year's business plan and the forward-looking 5-year plan. There are lots of moving pieces as we talk. So -- but you can be rest assured that we're looking at all the potential targets, high-value targets, which we have identified. As you would know that primarily now the higher potential targets are primarily in the north of the country, which are a bit more -- not exactly drilling friendly. So whatever we'll do, we'll make sure that we do them very effectively and get the most of the reserves, which are available in the country. As far as the CapEx is concerned, again that's a slightly -- pretty matured question. We're still working on what our expected CapEx could be for the next year. And I think, that would be a potent question you can ask at the end of the year.

And there are currently no further questions in the queue. I would now like to hand the call back over to you, Mr. Ahmed Hayat Lak for any additional or closing remarks.

Thank you very much. I hope our presentation clarified most of the issues and also to follow up Q&A session. So with this, I would like to close today's session. However, before we formally close, if there are any further questions, we will be more than happy to answer those. If there are none, then we can conclude today's session.

Thank you. There are no further questions.

All right. Thank you then.

Thank you for joining today's call. Ladies and gentlemen, you may now disconnect.