In this age of industrialization, the energy sometimes becomes the far important than the food.

These energy recourses are the wheels of an economy. In the countries as Pakistan where oil & gas needs are not 100% fulfilled through own production, oil & gas controls the economy growths. The oil and gas sector has a considerable impact on the economy – the sector attracts by far the highest level of foreign direct investments in the country, and raises significant tax income for the government. Pakistan’s current crude oil production meets only 18% of the total demand for domestic consumption. Along with the need of oil and gas for the purpose of transportation, Pakistan uses the hydrocarbons for the production of electricity. With the recent worst conditions in this sector, the oil & gas demand increased as people using the generators to produce the electricity at domestic and business level. Oil and Gas are major components of Pakistan's energy mix meeting over 79% of energy needs and therefore, successive Governments since independence have attached high priority to this sector. In 2007, Pakistan needed to import 319,500 bbl/day of oil to fulfill its growing needs. In 2008, its demand for oil was 383,000 bbl /day. Pakistan’s average daily production of crude oil and gas in 2007-08 was 70,205 barrels and 4,176 million cubic feet, respectively. Oil and gas companies seek Pakistan as the future market to capture. Its dependency on oil is increasing as the government is not using the alternative ways of energy like solar, wind and nuclear. The reason is that GOP is not paying attention along with low level of education and awareness among people. Natural gas accounts for the largest share of Pakistan’s energy use, amounting to about 50 percent of total energy consumption. Pakistan currently consumes all of its domestic natural gas production, but without higher production, Pakistan will need to become a natural gas importer. The future business of E&P companies is bright. These E&P companies have a very big chunk that they can grab. The reason is the difference between demand and supply gap. In addition, the lack of refining capacity leaves Pakistan heavily dependent on petroleum product imports. Pakistan has ambitious plans to increase its current output to 100,000 bbl /day by 2010 to reduce it oil dependency somewhat. There are 19 E&P companies are operating in Pakistan including foreign and local. More than 20 companies operating as the service providers. OGDCL is the national oil & gas company of Pakistan and the flagship of the country’s E&P sector. The Company is the local market leader in terms of reserves, production and acreage, and is listed on all three stock exchanges in Pakistan and on the London Stock Exchange since December 2006. It is 100% equity financed company; with 85% shares of GOP.

Current ratio: it has historically decreasing trend but there was rapid decrease in 2008. In 2004, this ratio was 13.15 times which was not normal. As it was, part of management policy to reduce the gap and do not accumulate heavy amounts in the current assets. In 2007, this ratio was 6.65 times but has a great change in 2008 and was 3.72 and it again rose to 4.08 times in 2009. In 2007 the current assets declined by 3.3% from 2006 and assets growth was 2.07%. In 2008 the assets growth was 14.2% and liabilities growth was abnormally high was 48.1%. That was the major reason why this value was very low in 2008. In 2009, the growth in assets was 8% while a decline of 0.7% in liabilities so the value rise was favorable. Despite all the factors and fluctuations in most the parts of assets and liabilities like spare parts, stock in trade, other receivables and financial assets (110% decreased in cash and stock decreased by 40%) but the major fluctuation is caused by the change in trade debt. In current assets portion the trade debt is major changing factor its value increased by 12.1% in 2007, 31.5% in 2008 and 27.5% in 2009. In addition, in liabilities portion trade payables are major factor, as this constitute 100% in 2007 also with a growth of 35.5% and 80.30% part in 2008 with 35.4% growth and in last 88% in 2009 with an 8.6% growth. The peer group has 2.28 values, which is strong reflector of OGDCL position OGDCL has a good liquidity and is not in danger zone. This rapid increase in trade debt is due to the following reasons; the funds were blocked to due to rapid increase in oil prices above $50 per barrel and this over amount was stopped by refineries due to government of Pakistan policy and now in new policy the government. Now E&P companies will share equally above amount so in near future this amount will be decrease due to this affect another reason was Uch Pvt Ltd has major amount of debts for the damages related to minimum supply of gas. All the companies were affected by this policy. Quick Ratio: quick ratios followed the trend of current ratio 5.44 in 2007, 2.94 in 2008 and 3.25 in 2009. As the E&P campiness do not try to have accumulated stock of hydrocarbons so the value of Stock in not great. Here we used stores & spare parts as inventory because the one of the main functionality of oil and gas companies is the services the carryout for find oil and gas. These tools are an important part of expenses and it is not easily saleable so we used this for analysis. The decline of this ratio was mainly due to the reduction of tools and spare part and other factor is trade debt, already discussed, in first ratio in detail. The peer group average is 2 that again is a good sign that company is in good conditions.

Return on Asset: the ratios in the last three years are these; 47.2% in 2007, 51.4% in 2008 and 45.5% in 2009. This ratio is been better from some previous years due to change in management and company’s goals. This ratio has two most important parts first EBIT and second Asset. The fluctuations of these two are as in the years, in 2007 EBIT declined with an 8% and Assets increased with 6%. EBIT growth was 22% in 2008, Assets growth was 15%, and in 2009, the growth of EBIT was 3.23% and Asset growth was 14.4%. The reason for increase in return on asset was due to the greater control over operating expenses as 18% decrease in expenses were seen. In addition, 28.4% decrease in exploration expenses measured along with the 23% decrease in administration expenses. Decrease in exploration expenses is due to reduction in the number of wells spudded in 2008 only 31(41 in 2007). The reduction in operating and administration expenses is a very good sign that management was conscious about the cost control. However, as these things again rose in 2009 so that reduction in ROA is noted. This shows in ineffective management procedures. In assets, the significant increase in development and production assets intangible increase is 25% and it is the major contributory factor along with the trade debts. The increase in trade debt noted is 12.1%, 31.5% and 27.5% respectively in three years. Reason for this increase was increase in oil prices and money withheld by refineries as the government rules. Now this is changed and company is confident in near future to get this money back so great increase in ROA is expected in 2010 and 2011 because as assets would decrease the ROA would increase. As debt was 27% of total asset in 2008 and 31.5% in 2009. The industry average is 10% which shows that OGDCL is very profitable in this regard. Foreign company says that this is due to government favor to Pakistani companies. Gross Profit Margin: In 2007, GPM was 69.61%, in 2008, GPM was 69.5% and in 2009, it was 70%. The main expenses to get benefit from identified oil & gas well are usually operating expense and Royalty. The company reduced its operating expenses by 18% in 2008, which was extraordinary, that company operated in more areas and even that it reduced this cost. Therefore, due to these reasons the gross profit increased by 20.2% in 2008 and only 4.35% in 2009. The reason that GPM what not changed that much was that sales also increased greatly; it increased by 20% in 2008 the reason was that it found the 10 new oil wells in 2007 year so the sales were increased. In 2008, only five new wells were discovered that is why the reason sales were increased by 3.76% only. In addition, in 2010 sales are not expected to be increased by 2% according to us because only two new well were discovered

in 2009. The peer group average is 32% and highest is 58% of POL. That shows that OGDCL is managing its assets efficiently. Net Profit Margin: The NPM was 45.5% in 2007, 35.2% in 2008 and 42.45% in 2009. The historical trend of NPM is always above 42% in pervious 5-6 years. The reason for this fluctuation despite the following trend in GPM was only due to tax expenses. The other minor changes are not significant enough. The tax expenses rose greatly due to two main reasons that increase in corporate tax rate i.e. 55.73% was in 2008 and it was 51.99% in 2009& 52.48% in 2007. Moreover, company paid more tax in Tax of Prior year adjustment clause. Therefore, this fluctuation does not give that massage that some problem has occurred in that year. So net profit decreased by 3% in 2008 as compared to 2007 and in 2009, the increase in profit was 20% it was also due to reduced tax expenses. Sales increased by 20% in 2008 and only 3.76% in 2009. The reason for the increase in sales is that 10 new oil well were discovered during 2007 and 5 were discovered in 2008. As new well discoveries reduced to only 2 in 2009 so in 2010 not more than 2% sales growth is expected. The peer group average is15% only as compared to 42% of OGDCL in 2009. Return on Equity: ROE was 45.3% in 2007, 40.15% in 2008 and 44% in 2009. According to DuPont equation, the ROE has three main parts first Net Profit Margin (discussed earlier), second is Total Asset Turn Over and third is the Equity Multiplier. Net Profit Margin reflects the expenses control, Total Asset Turn Over reflects the operating efficiency and the Equity Multiplier reflects the Risk. The TATO changes are due to sales and asset. the value changed greatly due to the two reasons the sales growth was 20% while assets growth was only 14.4% so the vale increased in 2008 while it decreased in 2009 as assets growth was greater than sales. The third element is Equity Multiplier. One important thing is that OGDCL is a 100% equity financed company. Now the conclusion is that the increase in ROE due to NPM and TATO is good sign but due to Equity Multiplier is not a good sign. The decrease in ROE in 2008 was due to decreased NPM even though the TATO and equity multiplier increased sufficiently. NPM decreased due to high growth in sales and 3% decline in net profit due to increased tax expenses. Sales increased 20% and total asset 15% in 2008 so operating efficiency increased and is a good sign even ROE decreased it shows that asset utilization of OGDCL increased in 2008. In 2009, the NPM has a value of 42.45% the reason for its increase was lower tax expenses and reduced royalty expenses. TATO decreased because the growth in sales was only 3.76%, on the other hand total asset growth was 14.4%

mainly due to trade debts, development, and production asset increase. The contributory factor was equity multiplier but that also shows that risk on the company is more risky with each year so the positive impact on ROE due to this factor is not a good sign. In 2010, this impact would reduce due to decrease in trade debts will decrease so equity multiplier ratio will decrease. Peer group average is 17%, speaks that company has greater return on equity. Total Asset Turn Over: TATO was 77.5% in 2007 82.6% in 2008 and 73.5% in 2009. The sales growth in 3 years is as follows 3.5% in 2007, 20% in 2008 and 3.76% in 2009. The asset growth in these years is as 6.2% in 2007, 15% in 2008 and 14.4% in 2009. The growth in assets is trade debt (reasons are defined earlier) and growth in development and production assets-intangible. The intangible assets and trade debts are 60% of total assets in 2009. The growth in development and production assets-intangible is 24.7%, 22% and 25% respectively. In 2008, the greater TATO was due to the increase in the sales as compared to assets. In addition, in 2009 as sales growth was lower than growth in assets. The increase in trade debts extraordinary was not in company control rather it was because of government policies. Peer group average is 70% and Mari gas has 129% in 2009. This shows that there is space of improvement as TATO of Mari gas and BP is over 100%. Account Receivables turn Over: By using sales as credit sales, the ratios are 2.7 times in 2007, 3.67 times in 2008 and 3.83 times in 2009. The growth in credit sales was 12.1% in 2007, 31.52% in 2008 and 27.5% in 2009. The increase in trade debts is due to increase oil prices over $50 per barrel. The collection period had a increasing trend in these years as in 2007 it is 95 days, 99 days in 2008 and 135 days in 2009. Peer group average is 5.37times that is greater than OGDCL. POL has succeeded for better asset utilization in same environment with 8.31 times. Stock Turn Over: The value is 2.499 in 2007, 2.55 in 2008 and 2.29 in 2009. This shows that how many times the inventory is turned into sales. If we measure these values in number of days than they are 146 day in 2007, 143 day in 2008 and 159 days in 2009. Therefore, in 2009 it takes 159 days from inventory come in to sale occurred. Peer group average is 7.56 times, is shows that company stock management is poor than peer group the reason may be that OGDCL has to buy spare parts prior to need as these are not assembled in Pakistan to avoid the bad circumstances. As this company is 100%, equity financed so no need to go for leverage ratios. However, in near future company will be going for debt financing to capture the market.

Porter’s Five Force Model Potential New Competitors: it’s not easy for companies to entre in this market as capital requirements are very huge. Although if the new company enters in this sector it has about same access to distribution channels but to archive the economies of scale is difficult. Substitute Product: Many countries are using alternative ways of energy but in Pakistan till near future there is no chance that GOP or people themselves moves towards alternative energy recourses. Also the psychology of people is to show you superior to others that favor the high demand as people using personal vehicles and not the public transport as should be. Buyers Powers: In Pakistan E&P companies are production level is below demands. Few refineries are here and agreements are not made on individual basis rather GOP set the standard contracts so no buyer powers are present, rather GOP plays important role. Buyers are having two options either from E&P companies of Pakistan or import crude oil. Profit margins are also set at GOP level. Suppliers Power: Suppliers are no doubt strong and are not local. That may be the reason that OGDCL have too much inventory of spare parts. They are very important as E&P companies require the latest technology to grab the chunk. Industry Rivalry: Competition is increasing day by day as big foreign investors are looking Pakistan as future because GOP is having problems with demand of energy. About 19 E&P companies are operating in Pakistan. Major competitors are BP, MOL Pak, POL, OMV, PPL, Mari Gas, and Tullow. In services sector competitors are Schlumberger, Sprint, Halliburton, BHP and Shell. Pakistani companies get favor that the get percentage in joint ventures due to GOP policies. The salaries of skilled persons are very high in this sector as the foreign companies are coming these person has enough alternatives so OGDCL have to pay the equivalent amount due to competitive market. OGDCL is presently 100% equity financed but in near future OGDCL is going to have Debt finance to meet the increasing funds requirements and increase the earnings by utilizing it’s already manpower to maximum level. OGDCL has 85% government shares so GOP polices also effect greatly to take the new hires in office work which are not required at all. Also due to strong union the employees are not giving 100%. Many non skilled workers get entrance in critical positions like in Exploration department which can cause huge damage to company as employees are not taking responsibility as the industry standards.

Exhibits

Balance Sheet as at 30 June 2009
ASSETS
Non Current Assets
Fixed Assets Property, Plant and equipment Development and Production Assets- Intangible Exploration and Evaluation Assets Long-term investment Long-term loans & Receivables Long-term prepayments

2009

2008 (Rupee '000)

2007

28482194 49057766 8779699 86319659 2903133 1849707 85357 91157856 17464351 108301 56140092 2633965 419621 27156 979319 5087917 3973818 86834540 177992396

23229631 36808041 7672444 67710116 2860132 1806620 108937 72485805 16615095 151782 40705299 2339037 679165 180295 638921 10207516 8306548 79823658 152309463

21600201 28749993 6365706 56715900 2945938 1117755 39821 60819414 13178295 93788 27873515 1538657 292928 253222 1063389 13553959 5950713 68338172 129338172

Current Assets
Store, spare parts and loose tools Stock in trade Trade debts Loans and advances Deposits and short-term payments Interest Incurred other receivables Other financial assets Cash and bank balances

LIABILITES
Share Capital and Reserves
Share Capital Capital reserves Unappropriate profit 43009284 3658318 79503794 126171396 43009284 3503064 63902995 110415343 12131932 1528444 6795141 20455517 17215555 4223048 21438603 152309463 43009284 2438228 55169652 100616652 11023916 1423132 5151807 17598855 11122665 11122665 129338172

Non Current Liabilities
Deferred taxation Deferred employee benefit Provision for decommissiong cost 17710497 2008499 10814506 30533502 18747328 2540170 21287298 177992396

Current Liabilities
Trade and other payables Provision for taxes

Profit and Loss Account for year ended 30 June
Sales-net Royalty Operating Expenses Transportation Charges

2009 (Rupees'000) 130829579 -15155667 -22673893 -1522489 -39352049 91477530 3370823 -7459560 -1332982 -926027 -4259364 57503 80927923 -25388282 55539641 12.91

2008 125908304 -17320187 -19613345 -1472615 -38406147 87502157 3865536 -6612836 -1248640 -319283 -536799 -4387411 44680 78307411 -33969293 44338111 10.31

2007 10261191 -10877443 -18497388 -1087931 -30462762 69798429 3615231 -7406280 -1285476 -449561 -3213617

Gross Profit
Other Income Exploration and Prospecting Expenditure General and Administrative expenses Provision for impairment loss Finance cost Workers' profit participation fund Share of profit in associates- net of taxation

Profit before Taxation
Taxation

61058726 -15428762 45629964 10.61

Profit of the year
Earnings per share- basic and diluted ( Rupees)

After the 2006, the energy difference becomes even greater as electricity production becomes dependent on oil and gas so its demand increased.

For analysis we used the peer group having these companies; British Petroleum, sherritt (Canada), Pakistan Oil Fields and Mari Gas. The reason first two companies are BP is the market leader along with the OGDCL and Sherritt is Canadian company having foreign skills. While last two are Pakistani, companies both have GOP shares. So to make peer group realistic. No pure service companies are included. All of these companies are E&P companies

Ratios Current Ratio Quick Ratio ROA ROE NPM GPM TATO A/R TO Stock TO Operating Cycle Debt Ratio Debt to Equity Ratio

BP 1.14 0.729 0.11 0.165 0.07 0.247 1.014 8.14 9.48 80 0.5672 1.317

Sherritt 3.35 2.775 0.013 0.03 0.058 0.278 0.15 3.82 5.9 157 1.05 0.94

POL 3.55 3.44 0.167 0.2173 0.3837 0.578 0.4 8.31 2.2 209

Mari Gas 1.09 1.072 0.105 0.261 0.08 0.19 1.29 1.21 12.65 330

Average 2.28 2.00 0.10 0.17 0.15 0.32 0.71 5.37 7.56 194.00

The following graph shows the discovers of oil and gas well in Pakistan history, how much wells were spudded are also shown in this graph

TYPE / FORMULA
1. LIQUIDITY RATIOS Current Ratio= C. A/ C. L Quick Ratio= C. A- Invent / C. L 2. PROFITIBILITY RATIOS ROA= EBIT / Total Asset * 100 ROE= Net Profit / Equity * 100 NPM= Net Profit / Sales * 100 GPM= Net Profit / Sales * 100 ROE= Net Profit / Sales * Sales / Asset * Asset / Equity 3. ASSET UTILIZATION TATO = Sales / Total Asset A/R TO = Credit Sales / Avg. A/R Days Sales Outstanding= 365 / A/R TO Stock TO= COGS / Avg. Stock Days Stock Outstanding = 365 / Stock TO Operating Cycle = 365/Sales O + 365/Stock O 4. LIQUIDITY RATIOS *

2007

YEARS 2008

2009

6.16 5.44

3.723 2.94

`4.079 3.25

47.20% 45.30% 45.50% 69.60% 45.30%

51.41% 40.15% 32.20% 69.50% 40.15%

45.46% 44% 42.45% 69.92% 44%

0.775 3.83 95 2.499 146 241

0.8266 3.67 99 2.55 143 242

0.735 2.7 135 2.29 159 294

22% 27.50% 29.10% Debt Ratio = Debt / Asset 28.50% 38% 41% Debt to Equity Ratio = Debt / Equity *company is 100% equity financed these ratio are calculated by assuming liabilities as debts

Exploration and Development Wells from 2000 to 2008 in Pakistan

In comparison the following data is only by OGDCL with oil production and exploration activities

This graph shows that OGDCL held the 58.42% market share in 2008
Years Net Profit Margin Total Asset Turn Over Equity Multiplier Return on Equity 2007 2008 2009 0.4551 0.3521 0.4245 0.775 .826 .735 1.285 1.37 1.41 45% 40% 44%

This table gives the idea of the factors which causes change in ROE

The price fluctuation in international market that has its effects on Pakistan oil prices

This graph gives details of liquidity

This Profitability graph

This graph is about Leverage Ratios, assumed liabilities as Debt, company is 100% equity financed.

This graph shows the asset utilization values
8 7 6 5 4 3 2 1 0 2007 2008 2009 Group Avg

TATO A/R TO Stock TO

References:                           Mr. Asif Mehmood Anjum; Chief Services Engineer, MOL Pakistan. Mr. Bashart Ali Mirza; General Manager (Projects), OGDCL Pakistan. www.cia.com www.ogdl.com www.bp.com www.mpnr.gov.pk www.ppisonline.com www.spe.org www.pak.boi.gov.pk www.lmkr.com www.engineeringindustry.info www.cbr.gov.pk www.interior.gov.pk www.epb.gov.pk www.mol.com www.miswaco.com www.marigas.com.pk www.bluechipmag.com www.oilandgasinsight.com www.moodys.com www.wikipedia.com www.sherritt.com www.brecorder.com www.dawn.com www.oxfordenergy.org http://tonto.eia.doe.gov/dnav/pet/pet_pri_wco_k_w.htm

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