Company with highest Market Capitalization and

lowest risk, we present to you: Oil and Gas

Development Co Ltd (OGDC)

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CONTENTS

Section 1: Abstract...................................................................................................................................................3
Section 2: INTRODUCTION.......................................................................................................................................4
Section 3: METHODOLOGY.......................................................................................................................................5
Value at Risk (VaR)...............................................................................................................................................5

Historical Method..........................................................................................................................5
Variance-Covariance Method........................................................................................................5
Black-Scholes-Merton (BSM) Model:...................................................................................................................5
Section 4: RESULTS AND DISCUSSION......................................................................................................................6
Section 4(A) Value at Risk/Summary Statistics....................................................................................................7
Section 4 (B): Credit Default Risk......................................................................................................................13
Section 4(C): Some Eye on The Industry:...........................................................................................................16
Section 5: Risk Management Policy and Business Continuity Plan........................................................................17
Section 5 (A): Other Risks Faced By OGDCL.......................................................................................................17
Section 5 (B): How are we managing these risks?.............................................................................................18
Section 6: Conclusion:............................................................................................................................................19

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Section 1: Abstract

Risk management involves identifying, analyzing, and responding to potential risk factors that are
inherent in a business's operations. To be effective, risk management requires a proactive approach
to control future outcomes as much as possible, rather than reacting after a risk has already
occurred. By doing so, effective risk management can help reduce the likelihood of risks
materializing and mitigate their potential impact.

A well-designed risk management structure is more than just a tool for identifying existing risks. It
should also be capable of assessing uncertainties and predicting their potential impact on a business.
Based on this assessment, businesses can choose to either accept or reject certain risks, depending
on their pre-defined tolerance levels.

When dealing with risks, businesses generally have three response options to choose from:
 Firstly, avoidance involves eliminating the root cause of a risk altogether to prevent its
occurrence.
 Secondly, mitigation involves reducing the potential financial impact of a risk by taking steps
to decrease the likelihood of its occurrence.

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  Thirdly, acceptance may be the only option in some cases. This involves developing
contingencies to manage the impact of a risk if it does occur.

To create effective contingencies, businesses need to employ a problem-solving approach that

results in a well-detailed plan that can be executed promptly if needed. Having a contingency plan in
place allows businesses to deal with any barriers or obstacles to success by effectively managing
risks as they arise.

Effectively managing risks, using tools such as VaR and credit default risk analysis, can help
businesses and investors identify, quantify, and manage risks proactively. VaR provides a
quantitative measure of potential downside risk, allowing decision-makers to set appropriate risk
limits and take steps to diversify or hedge their portfolios. Credit default risk analysis helps assess
the creditworthiness of borrowers, manage lending terms, and determine risk mitigation strategies
to minimize the likelihood of defaults.

In conclusion, incorporating robust risk management practices, including VaR, credit default risk
analysis, and utilizing daily stock data for a specific company such as OGDCL, is crucial for businesses
and investors to make informed decisions, safeguard against potential losses, and enhance financial
stability. A solid risk management framework can aid in identifying, quantifying, and mitigating risks,
improving overall financial performance, and supporting sustainable business growth.

Section 2: INTRODUCTION

The purpose of this report is to provide investors with an in-depth understanding of the risks
associated with investing in OGDCL stock compared to the KSE-100 index. The study employed
various statistical techniques, such as mean, standard deviation, Skewness, and kurtosis, to compare
the volatility of OGDCL with the KSE-100 for years 2020-2022.

The results of the analysis revealed that OGDCL is more volatile than the KSE-100 index, suggesting
that investing in OGDCL stock carries a higher degree of risk compared to investing in the broader
market as the standard deviation of Log Returns of OGDCL is higher that of KSE-100 index. To assess
the normality of the data, the study computed the non-overlapping log returns of OGDCL and KSE-
100. The analysis showed that as the time horizon increases, the data tends to become more
normal, indicating that long-term investments in OGDCL stock may be less risky than short-term
investments.

The study also calculated the 1% VaR using the historic simulation method. The results of the
analysis showed that the maximum expected loss at 99% confidence does not exceed 0.15% in
recent times, suggesting that OGDCL is a relatively safe investment option. However, the weighted
historic simulation method was used to calculate VaR at 1%, 5%, and 10% confidence intervals,
which showed higher VaR values, indicating that investing in OGDCL stock at these confidence
intervals carries a higher degree of risk.

Moreover, the study assessed the systematic risk of OGDCL using the slope formula to evaluate its
sensitivity towards KSE-100. The results of this analysis showed that the systematic risk of OGDCL is

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0.7355, indicating that a one-unit change in KSE-100 index will result in 0.736 units’ changes in
OGDCL stock. This finding suggests that OGDCL is more sensitive to changes in the broader market
than some other stocks.

Overall, the findings of this analysis can be used by investors to make informed decisions regarding
investments in OGDCL stock. The study suggests that investing in OGDCL stock carries a higher
degree of risk compared to investing in the broader market, but the risk is manageable. Investors
should consider their risk tolerance, investment horizon, and overall investment strategy before
making any investment decisions.

Section 3: METHODOLOGY

Value at Risk (VaR)

Value at Risk (VaR) is a statistical measure used to estimate the potential financial losses that a firm,
portfolio, or position may incur within a given time frame. VaR is most utilized by investment and
commercial banks to assess the likelihood and extent of probable losses in their institutional
portfolios.

Risk managers rely on VaR to measure and control the level of risk exposure associated with specific
positions, entire portfolios, or across the organization.

VaR can be computed in three ways: through the historical method, the variance-covariance
method, or the Monte Carlo simulation method.

Historical Method
The historical method involves looking at past returns and ordering them from the worst losses to
the greatest gains. This method assumes that the past is a good indicator of the future and uses
historical returns to estimate the likelihood of future losses. Please refer to the "Value at Risk (VaR)
Example" section below for the formula and calculation process.

Variance-Covariance Method
The variance-covariance method, also known as the parametric method, assumes that gains and
losses are normally distributed. This method uses statistical tools to estimate the probability of
losses, based on the mean and standard deviation of returns. This method is suitable for situations
where the distribution of returns is known and reliably estimated. However, it may be less accurate
when the sample size is small.

Investment banks frequently utilize VaR modeling to assess the firm-wide risk, as different trading
desks within the organization may unintentionally expose the firm to highly correlated assets.

Black-Scholes-Merton (BSM) Model:

The Black-Scholes model is a mathematical model used to calculate the theoretical value of
European-style call and put options, under certain assumptions. The model is widely used in finance
to price options and other derivatives and is considered a cornerstone of modern finance.

There are several reasons why the Black-Scholes model is commonly used in finance:

The Black-Scholes model has several important elements, each of which plays a role in determining
the theoretical value of an option:

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  Underlying asset price: The current market price of the underlying asset (such as a stock or
commodity) is a key input into the Black-Scholes model.

 Option strike price: The strike price is the price at which the option holder can buy or sell the
underlying asset. The strike price is also a key input into the Black-Scholes model.

 Time to expiration: The time remaining until the option expires is a key input into the Black-
Scholes model. As time passes, the value of an option decreases, all else being equal.

 Risk-free interest rate: The risk-free interest rate is the rate of return an investor can earn on
a risk-free investment, such as a Treasury bond. The risk-free interest rate is a key input into
the Black-Scholes model, as it affects the present value of future cash flows.

 Volatility: Volatility measures the degree of variation of the underlying asset price over time.
The higher the volatility, the more uncertain the future price of the underlying asset is, and
the more valuable the option becomes. Volatility is a key input into the Black-Scholes model.

By incorporating these inputs into the Black-Scholes model, traders and investors can obtain a
theoretical value for options that can be used to make informed decisions about buying and selling
options.

Section 4: RESULTS AND DISCUSSION

In this section we will be discussing our results and findings based on VAR, comparing summary
statistics of OGDCL with KSE-100 and see what the risk is associated with OGDCL. We will then
investigate histogram which was made using the log returns for both the market and stock and see
how well our data is distributed.

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Section 4(A) Value at Risk/Summary Statistics

The mean for OGDCL is negative, indicating that on average, OGDCL's stock price has decreased. On
the other hand, the mean for KSE 100 is also negative, indicating a general decline in the overall
performance of the stock market.

The standard deviation for OGDCL is higher than that of KSE 100, which suggests that OGDCL's stock
price has been more volatile than the overall stock market.

The median for OGDCL is also negative, indicating that half of the observations in the dataset have
values below zero, while the median for KSE 100 is positive, indicating that the middle value of the
dataset is positive.

The range for OGDCL is wider than that of KSE 100, indicating that the highest and lowest values in
OGDCL's stock price are more spread out than in the overall stock market.
The kurtosis for OGDCL is positive, indicating that the distribution of OGDCL's stock price is more
peaked than the normal distribution. The kurtosis for KSE 100 is also positive, indicating a similar
pattern.
The skewness for both OGDCL and KSE 100 are negative, indicating that the distribution of both
datasets is skewed to the left. This suggests that there are more extreme negative values in the
datasets than there are positive values.
Overall, the statistical measures suggest that OGDCL's Log Return has been more volatile than the
overall stock market and has experienced a greater decline in value.

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Skewness and kurtosis are both in normal range however, KSE-100 has higher kurtosis as
also appearing in graphs. Distribution of both OGDCL and KSE-100 is normal as it also
confirms from graph below.

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In the given data set, as time horizon increases, our mean value is getting closer to -1. This means
that data is normally distributed. However, The minimum value for daily log returns is -0.1217, which
means that with a 95% level of confidence, the maximum potential loss of the investment over one
day is 12.17%. The minimum value for 5 day log returns is -0.2207, which means that with a 95%
level of confidence, the maximum potential loss of the investment over five days is 22.07%. The
minimum value for 10 day log returns is -0.4180, which means that with a 95% level of confidence,
the maximum potential loss of the investment over ten days is 41.80%. The minimum value for 15
day log returns is -0.4307, which means that with a 95% level of confidence, the maximum potential
loss of the investment over fifteen days is 43.07%.

Kurtosis is a statistical measure that describes the shape of a probability distribution. It measures the
degree of peakedness and thickness of the tails of a distribution compared to the normal
distribution.

A normal distribution has a kurtosis of 3, which means that its tails are neither too thin nor too thick.
A distribution with kurtosis greater than 3 has fatter tails than the normal distribution, indicating a
higher probability of extreme events. A distribution with kurtosis less than 3 has thinner tails than
the normal distribution, indicating a lower probability of extreme events.

In the given dataset, the kurtosis values for daily log returns, 5-day log returns, 10-day log returns,
and 15-day log returns are 6.524348211, 4.589593522, 6.325980795, and 6.351533231, respectively.

These kurtosis values indicate that the distributions of the log returns are all leptokurtic, meaning
they have fatter tails than the normal distribution. In other words, the data has a higher probability
of extreme events or outliers than what would be expected from a normal distribution.

The kurtosis values for 5-day log returns and 15-day log returns are slightly lower than the kurtosis
values for daily log returns and 10-day log returns, indicating that the distributions of log returns
over five and fifteen days are slightly less peaked and have slightly thinner tails than the distributions
over one day and ten days. However, all the kurtosis values are significantly higher than 3, indicating
that the distributions have a higher probability of extreme events than a normal distribution.

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The above hypothesis about Kurtosis makes much more sense after seeing this graph of 1% 1-day
VaR. The average value of 1 day VAR was 0.061% but by the mid of June 2020, The value of VAR
went high to 0.423% due to the time of covid when petrol prices were kept down due to high
amount of supply and low demand. OGDCL prices at this time went to as low as s 75 from 134 in the
span of just 1.5 months. This increase the VAR values as investors were losing their money in this
time frame but soon after this slump period the stock value started gaining momentum back and
share price started building up again.
1% 1-day VaR was calculated and the same was plotted on the graph and as we can see that the
maximum loss went to the peak in March to April of 2020 mainly due to reasons discussed above
and it went as high as 0.4%. If we were to take the average VAR in the time 2020-2022. It was quite
low to roughly around 0.03% which means that 99% of the time, the maximum loss OGDCL give was
just 0.03% in the span of 3 years.

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The graph above shows the 2 other strategies of calculating VAR: Historical Simulation and weighted
historic simulation. Historical simulation VaR for OGDCL was calculated at 1%, 5%, and 10%, and the
results are presented in the graph above. It is worth noting that these results are quite different
from those obtained by the RM variance method. For instance, using HS VAR at, 1% VaR is 6.3%,
which is considerably higher than the RiskMetrics method. Additionally, as the confidence interval
decreases to 90%, the VaR also decreases to 2.2%.

Weighted historical simulation VaR was also calculated for OGDCL, the 1% VaR is approximately
5.8%, which implies that the maximum loss would not exceed 5.8% in 99% of cases. Similarly, the
VaR is 2.8% and 1.8% at 95% and 90% confidence intervals, respectively. It is noticeable from the
graph that as the confidence interval reduces from 99% to 90%, both historical and weighted
historical simulation methods produce the same results.

Systematic risk or BETA for OGDCL was calculated using the slope formula, Beta was 1.25. This value
represents the sensitivity of OGDCL towards the KSE-100 index, which means that one unit of change
in the KSE-100 index will result in a 1.25 unit change in OGDCL's stock.

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The charts above display the daily log returns for investments of Rs. 10,000,0 made using the RM
method and the Historical Simulation method for OGDCL. It is quite evident that the historical
simulation returns are less volatile than the RM method over the time span of 3 years. Furthermore,
if the cumulative returns of both methods are plotted, the results would resemble the graph below.
The good thing about both the graphs are that they are following the same trend, when there was
economical shocks in period of mid 2020, and start of year 2021, There was seen some volatility
shocks. But due to the fact that Historical simulations account for 10 days log return percentile, we
faced less volatility shocks by using this method of investment.

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The cumulative daily log returns from both methods show a similar trend with comparable values
over the given time period. However, the trend suggests that both the Method tends to yield higher
gains during positive market conditions, but also incurs greater losses during negative market
conditions. In contrast, the Risk Metrics Method controls for such risks. Any investor who is more of
a risk averse must use this way to invest and mitigate risk factor. This will give them low gains in
respect to low risk they are taking.

Section 4 (B): Credit Default Risk

The table represents three financial ratios and the corresponding values for a company over a period
of three years.

 Long Term Debt to Equity Ratio:

This ratio shows the proportion of a company's long-term debt to its equity. It is calculated by
dividing long-term debt by equity. A higher ratio indicates that the company is relying more on debt
to finance its operations, which could lead to higher financial risk.
In the given table, the Long Term Debt to Equity Ratio for the company increased from 11 in 2021 to
13.2 in 2022, indicating an increase in the company's reliance on long-term debt to finance its
operations. The low debt level of the company can have both advantages and disadvantages. On the
positive side, the lower debt levels can decrease the company's financial risk by reducing
vulnerability to interest rate fluctuations and default risks. This, in turn, can provide greater
flexibility in financing decisions and enable the company to reinvest profits into the business or
distribute them to shareholders.

However, on the negative side, excessively low debt levels may limit the company's ability to pursue
growth opportunities that require significant capital investments. Additionally, the low debt levels
may result in a lower credit rating, which may increase the cost of borrowing in the future, if the
company needs to raise funds.

 Book Value:
This ratio represents the net worth of the company's assets after all its liabilities have been paid off.
It is calculated by subtracting total liabilities from total assets.
In the given table, the Book Value of the company has increased from 178.95 in 2021 to 203.54 in
2022, indicating an increase in the net worth of the company's assets.

 Retention Ratio:

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This ratio indicates the portion of earnings that the company retains to reinvest back into the
business instead of paying it out as dividends to shareholders. It is calculated by subtracting
dividends paid from net income and dividing it by net income.
In the given table, the Retention Ratio of the company has increased from 67.58% in 2021 to 76.69%
in 2022, indicating that the company is retaining more of its earnings to reinvest back into the
business.

 Return on Equity:
This ratio shows the amount of net income earned by the company as a percentage of its
shareholder's equity. It is calculated by dividing net income by shareholder's equity.
In the given table, the Return on Equity for the company has increased from 11.89% in 2021 to
15.28% in 2022, indicating an improvement in the company's ability to generate profits from the
money invested by its shareholders.

The idea behind this table is to see how much of the holding of OGDCL belongs to the Government
of Pakistan, it shows that 67. The probability of OGDCL defaulting 5% of total holding is owned by
the state itself which can actually relates to our next section: The probability of OGDCL defaulting, it
is to be seen that by using black scholes model to calculate default, the chances of OGDCL defaulting
is near to impossible since government will not let them default and also for the fact that the
company is so big in terms of market share and despite having >0 Debt to equity ratio, it has such a
small chance of getting default as we calculated in the table below.

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This low probability of default was primarily due to OGDCL's strong financial position. The company's
financial position refers to its ability to generate cash flows and profits, as well as its liquidity and
solvency. OGDCL's financial position was strong, which means it had a good cash flow generation
capacity, profitability, and was not likely to face any liquidity or solvency issues.

Overall, the analysis indicates that OGDCL had a robust financial standing over the past few years,
which has contributed to its low likelihood of default. A strong financial position and adequate debt
levels not only reduce the risk of default but also provide the company with greater flexibility in
terms of financing decisions. This can allow OGDCL to reinvest its profits into the business or return
them to shareholders, and help it take advantage of growth opportunities.

Section 4(C): Some Eye on The Industry:

In this section we will see some gearing ratios and the overall numbers of the top companies in the
Oil and Energy sector along with some numbers of the overall industry average.

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The industry averages for long-term debt to equity ratio were 14.98 in 2022, 14.19 in 2021, and
16.92 in 2020. On the other hand, OGDCL's long-term debt to equity ratio was 13.2 in 2022, 11 in
2021, and 12.53 in 2020. This indicates that OGDCL had a lower long-term debt to equity ratio
compared to the industry average in all three years. This suggests that OGDCL relied less on long-
term debt financing to fund its operations compared to the industry.

The industry averages for total debt to assets ratio were 0.22 in 2022, 24.29 in 2021, and 26.15 in
2020. OGDCL's total debt to assets ratio was 0 in 2022, 19.49 in 2021, and 20.07 in 2020. This
indicates that OGDCL had a relatively lower level of total debt compared to its assets compared to
the industry. In 2022, OGDCL did not have any total debt, which is significantly lower than the
industry average of 0.22.

The industry averages for total debt to equity ratio were 0.31 in 2022, 33.70 in 2021, and 37.64 in
2020. OGDCL's total debt to equity ratio was 0 in 2022, 24.21 in 2021, and 25.11 in 2020. This
indicates that OGDCL had a lower level of total debt compared to its equity compared to the

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industry in all three years. In 2022, OGDCL did not have any total debt, which is significantly lower
than the industry average of 0.31.

Overall, the comparison shows that OGDCL had a relatively lower level of long-term debt, total debt,
and a lower reliance on debt financing compared to the industry averages. This could be indicative of
OGDCL's conservative financial policies and its ability to fund its operations through internal
resources, such as cash flows from operations, rather than relying on external sources of funding.

Section 5: Risk Management Policy and Business Continuity Plan

Section 5 (A): Other Risks Faced By OGDCL
STRATEGIC RISK
The strategic risk for OGDCL lies in its ability to maintain the success of its drilling and low-cost
strategies in conducting E&P operations. In response to this risk, OGDCL focuses on using the latest
production techniques, reservoir management practices, and innovative technologies to discover
new reserves and boost production while maintaining its low-cost operator status. The company also
renews and repositions its exploration portfolio to ensure long-term sustainability and increased
shareholders' value.

Commodity Price Risk

OGDCL's financial performance is significantly influenced by crude oil prices in the Middle East, as
they are linked to the crude prices in Pakistan. However, the company's gas sales are less prone to
price risk as the gas prices of major fields are capped at fixed crude oil/HSFO prices and sales
revenue is affected only if international crude oil prices fall below the capped price.

Foreign Currency Risk

OGDCL faces foreign currency risk as crude oil and gas prices are determined in US dollars and
translated into Pak rupees using exchange rates established by the regulatory authority. A decline in
the value of Pak Rupee against US dollar has a positive impact on the earnings and vice versa.
However, the currency risk arising due to foreign currency payments made for purchase of material,
equipment, and hiring of third-party services is neutralized by natural hedging provided by the
company's pricing mechanism.

Credit Risk:

OGDCL has significant trade debts from crude oil refineries and gas distribution companies, which
are slow to settle, resulting in an Inter Corporate Circular Debt issue in the energy industry. OGDCL is
taking measures to recover outstanding receivables and prevent liquidity problems, including follow-
ups and liaison with the Government of Pakistan. The company believes that the outstanding
amount is fully recoverable, and the government is working towards a satisfactory settlement of the
Inter Corporate Circular Debt issue.

Liquidity Risk

OGDCL is not exposed to liquidity risk as it has a debt-free balance sheet. However, prolonged non-
payment of trade debts may result in the need for borrowing to carry out planned activities and

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discharge statutory obligations.

Reserves Risk

OGDCL's proven reserves data refers to estimated quantities of oil and gas that are economically
producible under existing conditions. Any downward revision in the estimated quantities of reserves
could adversely affect future production volumes, influencing business operations and financial
results. To mitigate this risk, OGDCL internally evaluates and updates reserves based on production
performance, oil and gas discoveries, and workover jobs. Additionally, an independent international
expert conducts a reserves evaluation study every three years for verification and updating of
reserves status.

Exploration and Production Risk

OGDCL's operational activities carry inherent risks such as well blowouts, mechanical failures, and
adverse weather conditions that can result in severe damage, production loss, and even loss of life.
To mitigate these risks, OGDCL focuses on routine check-ups, repair and maintenance of plant and
machinery, and maintains insurance coverage. However, drilling of exploratory wells involves the
risk of not finding any commercially productive oil or gas reservoirs, which could adversely impact
future production levels and growth prospects. Additionally, exploring and developing oil and gas
fields is a capital-intensive activity requiring sufficient cash flows. To counter these risks, OGDCL
maintains financial discipline and has formed value-driven joint ventures with leading E&P
companies to carry out safe, compliant, and cost-effective exploration, development, and production
operations.

Section 5 (B): How are we managing these risks?

The importance of risk management for OGDCL's business is highlighted as it helps in identifying,
mitigating, and monitoring potential risks. The effectiveness of the Risk Management Policy and B
OGDCL considers risk management and internal controls as crucial for its business success, and the
company's risk management policy is aimed at protecting people, environment, assets, and
reputation while ensuring good governance and creating long-term shareholder value. The Board
oversees the risk management framework, and management implements it through various steps
such as formulating SOPs, identifying risks, using risk management techniques, formulating
mitigation plans, and regularly assessing risks. OGDCL also has an extensive Emergency Response
Procedure and a Disaster Recovery Site for ERP applications to ensure business continuity. The
company conducts training sessions, mock exercises, and HSEQ awareness events regularly to
enhance readiness in the event of an emergency or crisis.

Section 6: Conclusion:

In a nutshell, OGDCL is a company that has always have been investors paradise. However, the
recent economic conditions and the hike in oil prices have made things a bit risker for them which
can be seen in their current stock price. The stock went to as high as Rs140 in 2020 which dropped

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to Rs75 in the year end of 2022. They have identified some important risk such as Credit Risk as well
Commodity Price Risk due to high dependence upon crude oil prices. But as a risk management
student, if I were to see their risk measure under VAR and Blackscholes, I will be highly motivated to
invest in the company and the current market price doesn’t depict the real value of the company.
They are the giant in their respectable industry and have highest volume surpassing companies such
as PPL.

The chart above shows the change in price of Dollar in comparison with pkr. This upward trend has

peaked in recent times and have increased the challenges for the company.

As a whole, I would recommend that an investor must look upon certain dimensions before investing
in any company and in regards to OGDCL, there are big ticks on VAR numbers and default risks.
Other operational risks and systematic risks will be there but they always have the support of
Government of Pakistan. If we have to compare OGDCL with Kse-100, the have a higher volatility
which is a demotivating factor and it have a beta >1 which means that they will perform well when
market is not performing good. Overall, if I were to invest in OGDCL, I will definitely include them in
my portfolio.

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