e
Oil & Gas Development Company Limited
Financial Analysis Report
Period coverage: 1st July 2011 to 30th June 2012
Prepared and Presented by:
Dr. Babur Zahiruddin Raza,
Corporate Office
Consultant in Human Resources & Master Trainer in H.R Applications
Research Consultant
Mr. J. S Khan
IT Consultant
Mr. Raheel Rustam
Ph: 051-5584905, 5792836
Cell: 0332 – 4923235
Email: baburzahiruddin@yahoo.com,
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Financial analysis of Oil & Gas Development Company Limited-Year ended 30-06-2012
TABLE OF CONTENTS
SR no
Description
Page no
1
Financial analysis approach ------------------------------------------
3
2
Key discussion points for AGM---------------------------------------
9
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Financial analysis of Oil & Gas Development Company Limited-Year ended 30-06-2012
1. FINANCIAL ANALYSIS APPROACH
We have tried to perform holistic and integrated financial analysis of OGDCL with the help
environmental analysis, industry analysis, company operational review and annual report.
1.1 Flow chart of analysis approach
Environmental analysis
Industry analysis
Operational review of OGDCL
Financial analysis
2.2 Requisite essential documents for financial analysis
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Financial analysis of Oil & Gas Development Company Limited-Year ended 30-06-2012
The under mentioned documents are essential to perform comprehensive analysis of financial position,
performance and cash position of OGDCL
1.
2.
3.
4.
5.
Financial plan-Year 2011 to 2015
Audited financial statements-Year 2012
Internal audit reports
Management letter /. Letter of internal control from external auditors
Minutes of board meetings
3. Energy sector analysis
Energy is considered to be the lifeline of economic development. For a developing economy with a high
population growth rate, it is important to keep a balance between energy supply and emerging needs. If
corrective measures are not effectively anticipated significant constraints start emerging for
development activities. The rise in global energy demand has raised questions regarding energy security
and increased the focus on diversification, generation and efficient allocation. The answer lies in the
attainment of optimal energy mix through fuel substitution by promoting energy efficiency and
renewable energy and interregional co-operation. However, oil and natural gas will continue to be the
world’s top two energy sources through 2040.
Pakistan’s economy has been growing at an average growth rate of almost 3 percent for the last four
years and demand of energy both at production and consumer end is increasing rapidly.
Pakistan’s total energy consumption stood at 38.8 million tonnes of oil equivalent in 2010-11. The
relative importance of the various sources of energy consumption of Liquid Petroleum Gas (LPG),
electricity and coal has been broadly similar since 2005-06. The share of gas consumption stood at the
highest equal to 43.2 percent of the total energy mix of the country, followed by oil (29.0 percent).
3.1 Crude Oil
The total supply of crude oil for the fiscal year 2010-11 was 75.3 million barrels. The 68.1 percent was
imported and 31.9 percent was locally extracted.
3.2 Natural Gas
The consumption of increasing natural gas is rapidly. As on December 31st 2011, the balance
recoverable natural gas reserves have been estimated at 24.001 Trillion Cubic Feet. The average
production of natural gas during July- March 2011-12 was 4236.06 million cubic feet per day (Mmcfd) as
against 4050.64 (Mmcfd) during the corresponding period of last year, showing an increase of 4.57
percent. Natural gas is used in general industry to prepare consumer items, to produce cement and to
generate electricity. In the form of CNG, it is used in transport sector and most importantly to
manufacture fertilizer to boost the agricultural sector. Currently 27 private and public sector companies
are engaged in oil and gas exploration & production activities.
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Financial analysis of Oil & Gas Development Company Limited-Year ended 30-06-2012
3.3 Liquefied Petroleum Gas-LPG
LPG currently contributes only 0.5 percent to the total primary energy supply in the country. However,
87 percent of its demand is met through local production. The rest is imported. This lower share is
mainly due to local supply constraints and the higher price of LPG in relation to competing fuels like fuel
wood, dung etc. Currently, in Pakistan, out of 27 million households, approximately 6 million are
connected to the natural gas network while the rest are relying on LPG and conventional fuels such as
coal, firewood, kerosene, biomass etc. LPG has thus become a popular domestic fuel for those who live
in areas where the natural gas infrastructure does not exist. The annual total supply of LPG remained
467,476 tonnes; 1, 281 tonnes were produced daily during 2012, out of this 46 percent is produced in
the private sector while 54 percent is produced in the public sector. The three main sources of LPG are;
refineries 32 percent, gas producing fields 55 percents and imports 13 percent.
3.4 Petroleum products
Petroleum products are produced from the processing of crude oil at petroleum refineries and the
extraction of liquid hydrocarbons at natural gas processing plants. These products are further classified
into Energy and Non-Energy products. Energy products include Motor Spirit, Kerosene, High Octane
Blending Component (HOBC), High Speed Diesel Oil (HSD), Light Diesel Oil (LDO), Furnace Oil (FO),
Aviation Fuels, Naphtha and Liquefied Petroleum Gas (LPG), while Non- Energy products include Lube
Oil, Solvent Oil, Mineral Turpentine (MTT), Jute Batch Oil (JBO), Asphalt, Process Oil, Benzyne Toulene
Xylene (BTX), Wax and Sulphur etc. During 2011 the total production of petroleum products (energy and
non-energy) remained 9.40 million tones compared to 9.53 million tonnes during 2009-10; thus posting
a negative growth of 1.36 percent. Out of 9.40 million tonnes 8.91 million tonnes are energy products
while 0.49 million tonnes are non energy products. In these products diesel has the highest share of 34.9
percent followed by Furnace Oil (FO) having 25.9 percent. Motor Spirit and High Octane Blending
Component (HOBC) together have 13.3 percent while Aviation Fuels, Naphtha and Liquefied Petroleum
Gas (LPG) hold 8.8 percent, 8.6 percent and 1.9 percent respectively. Non-Energy products together
have 5.3 percent share in the total production of petroleum products.
The total import of petroleum products were 12.37 million tonnes while total export of petroleum
products were 1.57 million tonnes in 2010-11.
4. INDUSTRY ANALYSIS
We have applied the porter’s five competitive forces model to analyze the Electricity industry and its
details are stated as under
4.1 Listed companies in the Oil & Gas sector
1
Attock Petroleum Limited
2
Attock Refinery Limited
3
Burshane LPG ( Pakistan)Limited
4
Byco Petroleum Pakistan Limited
5
Mari Gas Company Limited
6
National Refinery Limited
7
Pakistan Oilfields Limited
8
Pakistan Petroleum Limited
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Financial analysis of Oil & Gas Development Company Limited-Year ended 30-06-2012
9
10
11
Pakistan Refinery Limited
Pakistan State Oil Company Limited
Shell Pakistan Limited
4.2 Threat of new entrants
Flexible requirements for entry in Oil & Gas industry
4.3 Threat of substitutes
At present, the substitute of electricity is not available for consumers
4.4 Bargaining power of suppliers
The bargaining power of fuel suppliers is relatively strong
Bargaining power of customers
The bargaining power of end users is weak
5.CORPORATE AND OPERATIONAL REVIEW OF OGDCL
5.1. Ownership structure
SR
No
1
2
3
4
5
6
7
8
9
10
11
12
Categories
Individuals
Investment companies
Insurance companies
Joint Stock Companies
Banks, DFIs, NBFIs
Modarabas and Mutual Funds
Foreign investors
Co-operative societies
Charitable Trusts
Others
OGDCL Employee Empowerment Trust
Government of Pakistan
Total
Number of
shareholders
21,706
7
12
129
14
71
117
1
21
120
1
1
22,200
Number of shares
% age
32,026,532
646,253
17,019,982
1,445,750
10,649,548
51,055,638
524,981,937
3
970,583
5,334,054
432,189,039
3,224,609,081
4,300,928,400
0.74
0.02
0.40
0.03
0.25
1.19
12.21
0.00
0.02
0.12
10.05
74.97
100.00
5.2 Strategic direction; Vision, Mission and objectives
Vision: To be a leading multinational exploration and production company
Mission statement: To become the leading provider of oil and gas to the country by increasing
exploration and production both domestically and internationally, utilizing all options including strategic
alliances.
To continuously realign ourselves to meet the expectations of our stakeholders through both
management practices, the use of latest technology and innovation for sustainable growth while being
socially responsible.
5.3 Overall strategic objectives
1. To build strategic reserves for future growth / expansion
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Financial analysis of Oil & Gas Development Company Limited-Year ended 30-06-2012
2. To improve reliability and efficiency of supply to the customer
3. To excel in exploration, development and commercialization
4. To improve internal business decision making and strategic planning through state of art MIS
.
5.4 Legal status and operational
Oil and Gas Development Company Limited (OGDCL), "the Company", was incorporated on 23 October
1997 under the Companies Ordinance, 1984. The registered office of the Company is located at OGDCL
House, Plot No. 3, F-6/G-6, Blue Area, Islamabad, Pakistan. The Company is engaged in the exploration
and development of oil and gas resources, including production and sale of oil and gas and related
activities. The Company is listed on all the three stock exchanges of Pakistan and its Global Depository
Shares (1GDS = 10 ordinary shares of the Company) are listed on the London Stock Exchange.
5.5 Number of employees


Regular employees: 10,185,000
Contractual employees:218,000
5.6 Quantity sold
Year 2011-12
17
2
13,713
381,863
75,005
21,400
19
Wells drilled
Oil & Gas discoveries
Crude oil sold in thousand BBL
Gas solid in MMcf
LPG sold in M.Tons
Sulphur sold in M.Tons
White Petroleum Products sold in thousand BBL
5.7 Key strategic assets of OGDCL
A.
B.
C.
D.
E.
Plant & Machinery
Rigs
Pipelines
Development and production assets
Exploration and evaluation assets
5.8 Exploration and development activities
As at 30 June 2012, the Company held the largest exploration acreage in the Country having thirty four
(34) exploration licenses which include twenty two (22) blocks with 100% interest and twelve (12) blocks
as operated JV covering an area of 61,079 Sq. Kms.
5.9 Production
Products
Crude oil barrels per day
7
FY 2012
37,615
FY 2011
37,370
Financial analysis of Oil & Gas Development Company Limited-Year ended 30-06-2012
Gas MMcf per day
LPG
1,091
205
1,013
195
5.10 Identification of key business, financial and non-financial risks as statutory report of directors
under section 236 of Companies Ordinance 1984
5.10.1 Exploration and Drilling Risks
Exploration risks include selection of incorrect exploration acreage, inaccuracies in acquisition,
processing, interpretation of seismic data and selection of exploratory well site. The Company is
exposed to variety of hazards during the drilling process including well blowout, fishing, fire and other
safety hazards. There is always a risk of failure in drilling exploratory wells. Risk of un-successful drilling
has an adverse effect on Company's earnings and growth.
5.10.2 Commodity Price Risk
The Company is exposed to fluctuations in international prices of crude oil and other petroleum
products, prices of which are determined by reference to the international market prices. International
oil prices are volatile and are influenced by global as well as regional supply and demand conditions. This
volatility has significant impact on the Company's net sales and net profit.
5.10.3 Credit Risk
Credit risk is the potential exposure of the Company to losses in case counter parties fail to perform or
pay amounts due.
5.10.4 Security Conditions
Security concerns in shape of armed conflict, terrorism, insurgency and political instability constitute
security risk and adversely influence the Company operations causing risk of loss or production
limitations, threat to the lives of the workers performing duties in these affected operational areas etc.
Exposure to such risks act as an impediment in the smooth running of the Company operations
particularly in the provinces of Khyber Pakhtunkhwa and Balochistan.
5.10.5 Strategic Risk
Strategic risk is the current and prospective impact on Company's earnings or capital arising from
adverse business decisions, improper implementation of decisions, or lack of responsiveness to industry
changes.
5.10.6 Environmental Risks
The Company is not insured against all potential losses and may be seriously harmed by natural disasters
or operational catastrophes. The occurrence of events such as earthquakes, hurricanes, floods,
blowouts, fires, explosions, equipment failure and other such events that cause operations to cease or
be curtailed, may negatively affect OGDCL's business and the communities in which it operates.
5.10.7 Commercial Risk
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Financial analysis of Oil & Gas Development Company Limited-Year ended 30-06-2012
Calculations of oil and gas reserves depend on estimates concerning reservoir characteristics and
recoverability, which geological, geophysical and engineering data demonstrate with a specified degree
of certainty to be recoverable in future years from known reservoirs and which are considered
commercially producible. The commercial risk associated with the reserves is that the actual quantity of
recoverable reserves may be different from the estimated proven and probable reserves.
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Financial analysis of Oil & Gas Development Company Limited-Year ended 30-06-2012
Key discussion points for AGM
Human Resources
More than 10000 employees makes OGDCL the second biggest corporate commodity as regards number
of employees being second to PTCL.
It is plagued with great HR problems.
a. Delay in payments to retiring employees for their buy back of shares of OGDCL under BISP.
b. The principal of right man for the right job being ignored as internal audit department was
headed for 4 months by non qualified person.
c. Lack of recognition of merit and discouraging employees who are upright and honest.
d. Lack of succession and progression planning.
e. Lack of continuous on job training and application of HR principals.
f. Too much of excess baggage as most of the employee are retiring in 2013 / 2014
Page 56 of Annual Report
Point no 1: Five years strategic plan of OGDCL
In the statutory directors reports, managing director / CEO of company state that board of directors
have prepared strategic plan of 5 years for OGDCL.
We make request to directors to share the key details of strategic plan for the information of members /
shareholders.
Page 41, 42 and 56 of Annual Report
Point no 2: Security conditions, new discoveries and exploration activities
In the statutory directors report, managing director share following key information
Security conditions- Page 56 of annual report
Security concerns in shape of armed conflict, terrorism, insurgency and political instability constitute
security risk and adversely influence the Company operations causing risk of loss or production
limitations, threat to the lives of the workers performing duties in these affected operational areas etc.
Exposure to such risks act as an impediment in the smooth running of the Company operations
particularly in the provinces of Khyber Pakhtunkhwa and Balochistan. This is potentially detrimental as
Company's exploration, drilling and development activities are hampered due to unfavorable security
situation resulting in affecting the Company's sustainable growth.
Discoveries-Page 42 of annual report
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Financial analysis of Oil & Gas Development Company Limited-Year ended 30-06-2012
The Company's exploratory efforts to locate new hydrocarbon reserves yielded two (02) new significant
oil and gas discoveries at Nashpa-2 exploratory well in District Karak, Khyber Pakhtunkhwa province and
at Zin X-1 exploratory well in District Dera Bugti, Balochistan province.
Exploration activities-Page 41 of annual report
The Company, however, could not commence operations in eleven (11) exploration blocks namely
Latamber, Wali, Jandran, Saruna, Shahana, Samandar, Shaan, Kohlu, Lakhi Rud, Kalchas and Jandran
West due to security reasons. In this context, OGDCL is in close liaison with the respective provincial
Governments and MP&NR for early resumption of exploration activities in the said blocks.
We would make request to directors to share the latest security conditions in the operational areas of
Company for the information of members / shareholders of OGDCL.
Page 49 of Annual Report
Point no 3: The reason of change in the composition of board members-OGDCL
The statutory report of directors reveals the fact that following changes had been occurred in the
composition of board of directors-OGDCL.
Mr. Masood Siddiqui was appointed as MD & CEO on 18 June 2012 in place of Mr. Basharat A. Mirza.
Ch. Muhammad Shafi Arshad was appointed as Chairman Board on 25 July 2012 in place of Mr.
Muhammad Ejaz Chaudhry.
Consequent upon transfer of Mr. Ahmad Bakhsh Lehri as Chief Secretary Balochistan, Mr. Babar Yaqoob
Fateh Muhammad was appointed on the Board as Director. Further, M/s Mohomed Bashir, Iskander
Mohammed Khan, Mohamed Anver Ali Rajpar, Sheraz Hashmi and Raza Ullah Khan were appointed on
the Board as Directors in place of M/s Syed Amir Ali Shah, Dr. Kaiser Bengali, Tariq Faruque, Wasim
Zuberi and Mr. Raashid Bashir Mazari.
We would make request to company management to share the reasons of changes in board of directors
Note # 30.2 on Page 111 of annual report
Point no 4: Non-compliance with financial reporting framework
The note to the financial statements 30.2 reveals the fact; Various appeals in respect of assessment
years 1992-93 to 2002-03, tax years 2003 to 2011 are pending at different appellate forums in the light
of the order of the Commissioner of Inland Revenue (Appeals) and decision of the Adjudicator,
appointed by both the Company as well as the Federal Board of Revenue (FBR) mainly on the issues of
decommissioning cost, depletion allowance and tax rate.
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Financial analysis of Oil & Gas Development Company Limited-Year ended 30-06-2012
The above mentioned note 30.2 reflects dispute of company management with tax authorities on the
issues of decommissioning or depletion allowance. The tax authorities’ stance on decommissioning and
depletion allowance is explicitly delineated in Part I of Fifth Schedule under section 100 of Income Tax
Ordinance 2001.
As per the requirements of IAS 37 and fourth schedule under section 234 of Companies 1984, the
provision for disputed tax issues should be recognized in the financial statement or it should be
disclosed under the heading of contingencies and commitments.
Note # 30.1 on Page 111 of annual report
Point no 5: Non statutory corporate tax rate on accounting profits
The note # 30.1 contains tax rate of 48.68% on accounting profits of OGDCL where as statutory tax on
accounting profits of companies is 35% under Division II, Part I of First Schedule of Income Tax
Ordinance 2001.
The directors of OGDCL are requested to clarify the query of tax rates on accounting profits for the
information of members / shareholders.
Page 66 of Annual Report
Point no 6: Unusual share of tax obligations in the total liabilities of OGDCL
The details of total liabilities of OGDCL as at 30-06-2012 are summarized below.
A. Total non-current liabilities: PKR 45,362,739,000
B. Total current liabilities: PKR 24,593,682,000
C. Total liabilities: PKR 69,956,421,000
The details of tax liabilities as at 30-06-2012 are stated as under
A. Deferred taxation: PKR 23,545,773,000
B. Provision for taxation: PKR 2,421,831,000
C. Total tax obligations: PKR 25,967,604,000
The % age share of tax obligations in the total liabilities of OGDCL: 25,967,604,000 / 69,956,421,000=
37%
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Financial analysis of Oil & Gas Development Company Limited-Year ended 30-06-2012
The Directors of OGDCL are requested to clarify the above mentioned query of members
Note # 15.2 on Page 101 of Annual Report
Point no 7: Non-compliance with section 234 of Companies Ordinance 1984 and
paragraph 60 of IAS 1 pertains to current and non-current distinction
The 15.2.1 contains disclosure regarding classification judgment of directors to classify short term
investment named as term deposit receipts under the heading of Non-current assets which constitute
non compliance with paragraph 60 of IAS 1 and section 234 of Companies Ordinance 1984.
Note # 18.1 on Page 104 of Annual Report
Point no 8: Liquidity and credit risk pertains to circular debt
The note # 18.1 reveals the fact that trade debts include amount of PKR 92,878,000,000 which is
receivable from oil refineries and gas companies. The directors of company have been negotiating with
Government to recover the trade 92.8 billion rupees under the circular debt arrangement.
We would like to make request to directors to share details of their efforts regarding the recovery of
92.8 billion rupees during the period from 01-07-2012 to 04-10-2012.
Note # 19.1 on Page 104 of Annual Report
Point no 9: Provision for doubtful debts for loan and advances of 3.2 billion
rupees
The 19.1 provide following details regarding the loan and advances amounting to 3.2 billion rupees.
“This includes an amount of Rs 3,206 million paid under protest to Inland Revenue Authority on account
of sales tax demand raised in respect of capacity invoices from Uch Gas Field for the period from July
2004 to March 2011. The Company has explained its position on various forums and the issue went to
Supreme Court of Pakistan which also turned down the appeal. However, the Company has filed a
review petition before the Supreme Court of Pakistan and based on advice of legal counsel, the
Company strongly believes that the matter will be decided in its favor.”
Under the requirements of applicable financial reporting framework of OGDCL the provision for doubt
debts amounting to 3.2 billion rupees should be recognized in the financial statement in order to ensure
true and fair view of financial performance and position under section 234 of Companies Ordinance
1984.
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Financial analysis of Oil & Gas Development Company Limited-Year ended 30-06-2012
The impact of non-recording of provision for doubtful debts is summarized as below.
A. Overstatement of profits
B. Understatement of expenses
C. Understatement of liabilities
Emphasis of matter paragraph on Page 65 of Annual Report
Point no 10: Emphasis of matter paragraph in the audit report under ISA 706
The audit report contains following emphasis of matter paragraphs
“We draw attention to Note 18.1 to the financial statements wherein it is stated that trade debts
include an overdue amount of Rs 92,878 million receivable from oil refineries and gas companies. We
also draw your attention to Note 16.3 to the financial statements wherein it is stated that long term
receivable amounting to Rs 606.937 million has not been paid by Karachi Electric Supply Company
Limited in accordance with settlement plan. Though the recovery of these debts have been slow due to
circular debt issue, the Company considers the amount as fully recoverable for the reason given in the
aforementioned notes. Our report is not qualified in respect of this matter”
We would like to make request to directors of company to explain the underlying rationale and reason
for emphasis of matter paragraphs in the audit report.
Note # 27 on Page 109 of Annual Report
Point no 11: The substantial increase in the prospecting expenditures
The note # 27 on page 109 of annual report reveals the fact that prospecting expenditures were
increased from PKR 2,689,007,000 to PKR 4,038,429,000 in Year 2012.
We would like to make request to Company directors to explain the underlying reason of increase in the
prospecting cost from year 2011 to year 2012.
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Financial analysis of Oil & Gas Development Company Limited-Year ended 30-06-2012
Note # 28 on Page 109 of Annual Report
Point no 12: The substantial increase in the advertising cost
The note # 28 on page 109 of annual report reveals the fact that advertising cost was increase from PKR
41,765,000 to PKR 152,023,000 in Year 2012.
We would like to make request to Company directors to explain the underlying reason of increase in the
advertising cost from year 2011 to year 2012.
Note # 24 on Page 106 of Annual Report
Point no 13: Sales and profitability of OGDCL
Non-financial sales data –Page 30 of annual report
Year 2011-12
Quantity sold
Crude oil sold in thousand BBL
Gas solid in MMcf
LPG sold in M.Tons
Sulphur sold in M.Tons
White Petroleum Products sold in thousand BBL
13,713
381,863
75,005
21,400
19
Year 2010-11
13,224
362,924
71,061
34,400
30
Financial sales data-Page 106 of annual report
Year 2011-12
Rupees
Gross sales
Crude oil
Gas
Gasoline
Kerosene Oil
High speed diesel oil
Naphtha
Liquefied petroleum gas
Sulphur
Other operating income
15
109,413,764,000
104,924,338,000
172,820,000
48,697,000
6,464,469,000
600,142,000
96,506,000
221,720,736,000
Year 2010-11
Rupees
84,825,937,000
93,823,246,000
75,940,000
47,045,000
1,823,000
151,162,000
5,424,125,000
880,162,000
47,478,000
185,276,918,000
Financial analysis of Oil & Gas Development Company Limited-Year ended 30-06-2012
Commodity Price Risk
The Company is exposed to fluctuations in international prices of crude oil and other petroleum
products, prices of which are determined by reference to the international market prices. International
oil prices are volatile and are influenced by global as well as regional supply and demand conditions. This
volatility has significant impact on the Company's net sales and net profit.
The analytical review of sales data, figures and commodity price risk reveals the fact that sales and
profitability of OGDCL were increased primarily from price fluctuations rather sold units.
In the light of above mentioned facts ,we would like to ask a question from Company directors regarding
strategic business planning to mitigate the commodity price risk and desired measures to ensure
organizational and financial sustainability in OGDCL.
CONCLUSION AND SUMMARY
OGDCL is like a jewel in the crown for Pakistan as it caters for more than 40% of the hydro carbon inputs
of the petroleum industry but it is plagued with great HR and security problems.
The new management with a fresh MD may play some pivotal role in stream lining the problems
enumerated above but they have a long way to go and a colossal task ahead of them.
On the financial side the monster of circular debt looms over their head which will be difficult to tackle
in the coming quarter.
The two finds at NASHPA and ZINN may give value addition to the company but putting ZINN online will
be a big hurdle because of the security problems.
The problems of taxation, sales tax and loss of appeal in the Supreme Court may have a negative bearing
on the future profitability of the company.
Finally a hold status is recommended for the shareholders of
OGDCL for the future.
DR. BABUR ZAHIRUDDIN
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Financial analysis of Oil & Gas Development Company Limited-Year ended 30-06-2012