Morning Shout released by KASB Securities Limited and Economics Research

Karachi: OGDC: Earnings upgrades look more certain; Buy

According to KASB Securities Limited,

• OGDC’s 3Q EPS of PRs6.4 (up 41% QoQ) carried a big +ve surprise for the market with 16% above-consensus earnings led by lower non-cash cost and taxes. EPS in 9M12 grew 41% on strong operational performance and higher oil prices.

• Market and general street estimates appear to be downplaying the strong underlying core-earnings trends in OGDC, in KASB Securities Limited’s view. KASB Securities Limited sees future earnings upgrade. Reiterate Buy on OGDC.

• OGDC’s top-line grew by 16% in 9M on combination of higher gas volumes (up 6%) and oil prices (up 26%). Other income jumped 3.3x on higher surplus cash. QoQ, receivables grew 8% to PRs118bn and remain KASB Securities Limited’s key concern.

• Operating cost is up 12% in 9M but down 11% QoQ on account of one-off impact of PRs1.2-1.5bn due to lower amortization cost. Cash payout has slipped to 28% in 9MFY12 from 37% in FY12.

Impressive 9M12 results boost confidence
Oil and Gas Develop. Company’s 3Q EPS of PRs6.4 carried a big +ve surprise for the market with 16% above-consensus earnings led by lower non-cash cost and effective tax. However, market reaction was muted as DPS of PRs1.5 (9M: PRs4.5) was at the lower range of expectation. Overall, impressive performance in 9M with EPS of PRs16.1 growing by 41% on strong operational performance and higher oil prices. KASB Securities Limited reiterates Buy on OGDC (PO: PRs180.6/sh), premised on strong volume growth (3-year volume CAGR of 14%, making OGDC one of the fastest growing E and P in Asia Pac), exploration and appraisal upside and undervaluation (FY13E P/E of 6.6x, EV/EBITDA of3.4x).

Consensus upgrade looks more certain now
Market and general street estimates appear to be downplaying the strong underlying core earnings trends in OGDC, in KASB Securities Limited’s view. KASB Securities Limited leaves KASB Securities Limited’s estimate unchanged for now (9M earnings constitute 75% of FY12 estimate) however highlight KASB Securities Limited’s FY12/FY13 estimates are 15-20% above consensus average.

Key highlights of 3Q/9M results
Top-line grew by 16% in 9M on combination of higher volumes and prices. Realized oil price is up 26% but gas price is down 9%. OGDC raised its gas production by 6% QoQ though oil flow was flat. Higher oil volume from Nashpa II (5,000bpd) in 2Q and gas addition from KPD (100mmcfd) remain key highlights. Overall, 9M volumes are up by more modest 6%. KASB Securities Limited sees stronger volume growth ahead as 3Q additions are fully reflected and more fields come online.

Exploration cost declined 38% due to higher capitalized cost and lower drilling.

Drilling has lagged with only 37% target achieved up to Mar-2012. Drilling should pick- up pace in 4Q however KASB Securities Limited now sees risk to FY12 target of 29 wells (12 exploration and 15 development). Zin remains a key success in 9M.

Other income jumped 3.3x on higher surplus cash (PRs67bn or PRs15.6/sh or ~10% of OGDC’s market cap). QoQ, receivables grew 8% to PRs118bn with PRs76bn now categorized as overdue amount (Receivables days of 220 in FY12 compared to 50 in FY05). Jump in receivables remains KASB Securities Limited’s key concern though KASB Securities Limited does not expect OGDC’s exploration and development capex to be affected.

Cash payout has slipped to 28% in 9MFY12 from 37% in FY12. OGDC is unlikely to step up dividend payout in near term given no near term relief on trade debt.

Operating cost is up 12% in 9M but down 11% QoQ on account of one-off impact of PRs1.2- 1.5bn due to lower amortization cost on recent successful appraisal drilling at Nashpa.