Pakistan Market Savvy

OGDC: Premier Oil acquisition & its impact

December 22, 2015

Oil and Gas Development Company Limited (OGDC) has recently issued notice
regarding participation in bidding round in corporate sale of Premier Oil Pakistan
Holding B.V. (POPH) which is subsidiary of Premier Oil Plc. OGDC submitted
non-binding cash offer to acquire entire issued share capital of POPH. If the offer
is accepted, the acquisition is likely to be completed by June 2016.
Premier Oil Pakistan: Small but gas rich firm
Premier Oil plc owns only 0.02% of worlds hydro-carbon reserve with overall
reserves of 243.3mnboe (million barrels of oil equivalent) which is far smaller than
Pakistans OGDC. In Pakistan, Premier Oil plc is operating since 1990 under the
name of Premier Oil Pakistan Holding B.V with overall reserves of 20mnboe.
Currently, the company is producing 59mmcfd (million cubic feet per day) of gas
from Qadirpur (5% working interest), Bhit & Badhra (6%), Kadanwari (16%),
Zamzama (9%) and Zarghun South (4%).
Premier Oil Pakistans annual sales are around US$80mn-US$100mn which is 8%
of Groups global sale of US$1.2bn. However, Pakistan is one of the most profitable
venture for Premier Oil plc as the company earns one of the highest margins. Thus,
despite profitable venture, the companys exit policy from Pakistan could be linked
to falling oil prices and short fall in working capital owing to consistent overall
losses, specially in UK, we believe.

Company Name
Symbol
Recommendation
Target Price (Rs)

Oil & Gas Dev. Co.

OGDC
Buy
144

Key Data
Current Price (Rs)
Avg. Daily Volume* (mn sh)
Outstanding Shares (mn sh)
Current Market Cap. (Rs bn)
Free Float (mn sh)

115.1
0.9
4,301
495
645

*52 Weeks

EPS (Rs)
P.E. (x)*
ROE (%)
P/ BV (x)*
DPS (Rs)
Div. Yield (%)*

Earning Snapshot
FY14A FY15A FY16E FY17F
28.8
20.3
13.3
14.7
4.0
5.7
8.7
7.8
31%
20%
12%
12%
1.3
1.1
1.0
1.0
9.3
7.3
4.9
5.4
8%
6%
4%
5%

*At Current Price

Source: Company Accounts, Sherman Research

Transaction size could be US$125-150mn

For valuing transaction size, we have applied various techniques including reserve
valuation and EV/boepd by which the acquisition may cost around US$125-150mn
for OGDC. We have also applied arbitrary discount to total value considering low
price scenario. Considering average well head gas price of US$3.5 per mmbtu and
lifting cost of US$0.6 per mmbtu, we believe the transaction may improve annual
earnings by Rs0.6 per share.
Huge cash of US$2.5bn
Given huge cash balance and lower interest rates it is conducive for the company
to utilize the funds for the acquisition, we believe. Interestingly, US$4.6bn company
is sitting at huge cash and cash equivalent of US$2.5bn (Rs60 per share). This
includes overdue receivables of US$0.8bn from oil refineries and gas companies
on account of inter-corporate circular debt which is backed by government
guarantee. Thus, with huge cash balance the company is comparable with any
mid-size bank in Pakistan as well.
OGDC: Trading below book value
Trading at FY17 PE of 7.8x, we maintain Buy stance on OGDC. However, with oil
price seems to be bottomed out, the only risk investors are concerned about is
foreign selling. Our estimates suggest that during FY16 overseas investors sold
around 50mn shares (10% of total holding by foreigners) mainly due to sharp
decline in oil price. We believe that the risk of foreign selling is over played given
the fact that the company is trading below book value compared to last 3-year
average P/BV of 2.4x. Even in our worst case scenario, assuming oil price to remain
US$30 per barrel, OGDCs FY17 EPS will be around Rs10.7.
Analyst Certification and other disclosures on last page

Aftab Awan
Email: aftabawan@shermansecurities.com
Tel: (+92-21) 35822822.
Sherman Securities (Private) Limited
Corporate Office: 501-502, 5th Floor Continental Trade
Centre G/6, Block-8, Main Clifton Road, Karachi.
Tel: (+92-21) 35302921-29.
Fax: (+92-21) 35302930, 35377468.
Email: research@shermansecurities.com.

Risk to valuation:
Risk to valuation includes 1) Volatility in global oil prices 2) Unexpected currency fluctuation 3) Unsuccessful drilling activity and
4) Further delay in project completion.
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Price Methodology:
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Sherman Securities employs a 3-tier rating mechanism i.e. Buy, Hold and Sell, which is based upon the level of expected return
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Buy
Sell
Hold

Rating Interpretation
14.5%.
10%
Between -10% to 14.5%.

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