Spotlight on OGDC & PPL

Subdued drilling activity reflects poorly on FY11’s success ratio

According to year end data issued by PPIS, exploratory drilling activity in the E&P industry for FY11 showed little improvement over the previous year. Of the 29 exploratory wells earmarked for drilling, only 15 wells were spud indicating an overall achievement of 52% against the target compared to 54% in FY10. Subsequently, drilling targets set in FY10 were twice as high as those in FY11; implying that if approximately the same level of resources had been utilized as those in FY10 the target may have been achievable to a far greater extent than was the case.

Spotlight – OGDC & PPL

For OGDC and PPL, the year showed little promise over the previous one as trade debts mounted up to a total of ~PKR 180bn thus limiting fiscal space for the 2 E&Ps’. OGDC appeared to learn its lesson over the previous year and set its exploratory drilling target at a far more modest number of 10 wells out of which 6 were spud by year end. Resultantly, with trade debts rising by an average of 18% QoQ in FY11 OGDC continued to be the worst affected during the year. However, contrary to the company directives indicating that external financing maybe utilized during the year to boost exploratory and development activities, the company’s balance sheet remains debt free to date.

Keeping a low profile

While PPL continued its conservative stance and targeted to drill only 1 well in the entire year (over none in FY10) it remained seemingly unaffected due to the limited nature of its exploration activities. However, its receivables rose by an average 12% over the quarter upto PKR 43bn in 3Q FY11 while its cash flows declined by 6% QoQ. The fate of one exploratory well drilled by the company remains to be seen as its drilling is currently in progress.

Successes…..not abound

The success ratio of E&P industry for the year clearly reflects in the conservative targets set out as success ratio for FY11 fell to 13% over 31% in the previous year, while the % of wells declared plugged and abandoned fell to 27% in FY11 from 35% in FY10.

Valuation

We maintain an overall ‘HOLD’ recommendation on OGDC and PPL with our Dec11 TP of PKR 141/share and PKR 221/share respectively while the stocks are currently trading at FY11E PE multiples of 9.3x and 7.5x respectively.

Global Securities Pakistan

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