January 08, 2025 (MLN): Oil and Gas Development Company Limited (PSX: OGDC) is poised to reach a price target of Rs335 per share by December 2025, offering a projected 53% capital gain and a 6.4% dividend yield.
Currently, the stock trades at a discounted Price-to-Book (P/B) ratio of 0.7x and a FY26 Price-to-Earnings (P/E) ratio of 5.0x, significantly below its 10-year averages of 1.5x and 5.9x, according to a report by Alpha Capital.
The gas system went from an OGRA-estimated shortfall of Rs171.2 billion in FY24 to a projected surplus of Rs78.9bn in FY25.
Reko Diq's vast copper and gold reserves could boost OGDC and Pakistan's prospects.
If OGDC sells 6.67% to Manara Minerals, we expect a one-off earnings impact of Rs5.1/sh and a valuation impact of Rs24/sh.
Alpha Capital’s base case assumes the project’s retention, yielding a valuation impact of Rs45/sh.
OGDC currently carries Rs608bn (Rs141/sh) receivables as of Sep-24.
Assuming the cash realizes in equal installments over 10 years, the discounted value is estimated at Rs61/sh.
Timely tariff adjustments in Nov-23 and Feb-24 slowed down the accumulation of circular debt in the system from Rs21.8bn/month in 1HFY24 to Rs0.5bn/month in 2HFY24.
1QFY25 has bolstered Alpha Capital’s faith in the potential of a circular debt resolution, with a staggering attrition rate (surplus) of Rs9.2bn/month.
This has resulted in a 4.25% QoQ decline in trade debts for OGDC during 1QFY25.
The reforms to the gas system aided OGDC’s gas sale recovery to climb to 149% during 1QFY25 against a staggering 3-year average of 52%.
With the significant recovery in gas sales, OGDC can now use its financial flexibility to arrest its production decline (5-year CAGR of -4.3% YoY for natural gas and -2% YoY for crude oil) via field development programs.
While improved cash flows may support a 50% dividend payout ratio, the financial obligations related to the Abu Dhabi Offshore Block 5 project could restrict the company's ability to achieve this target in the short term.
Therefore, Alpha Capital’s base case assumes a more conservative 40% payout ratio.
Third-party gas sale framework are poised to allow E&P companies to sell a maximum of 100mmcfd of gas from incremental production to parties possessing an OGRA license.
At a time where the 10-year transition to electric vehicles plan is the buzz and current copper resources are only expected to meet 80% of the global copper demand by 2035.
The 15% stake sell-off to Manara Minerals (Saudia Arabia), may force OGDC to give up a sizeable portion of the lucrative asset due to the government’s foreign exchange needs.
OGDC’s cash calls for this campaign are expected to total $304.7mn over the next 5 years. Any developments on the commercial operations of this block will act as a further positive trigger to the company’s earnings and valuation
OGDC currently holds Rs608bn in outstanding receivables, equivalent to Rs141 per share as of Sep-24, representing its strong financial position.
Risks
Key downside risks to Alpha Capital’s investment thesis include a decrease in oil prices, delays in the development of discoveries, and a low success ratio of drilling activities.
Additional risks involve the application of expected credit losses for receivables due from the Government of Pakistan (GoP) and a lower-than-estimated life of main reserves.
Continued curtailment due to RLNG line pressure and further delays in resolving circular debt also pose significant challenges.
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Posted on: 2025-01-08T14:22:41+05:00
