Financial Analysis Report OGDCL

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Financial analysis of Oil & Gas Development Company Limited-Year ended 30-06-2012

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Oil & Gas Development Company Limited
Financial Analysis Report
Period coverage: 1
st
July 2011 to 30
th
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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TABLE OF CONTENTS

SR no Description Page no

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Financial analysis approach ------------------------------------------

3
2 Key discussion points for AGM---------------------------------------

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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

2.2 Requisite essential documents for financial analysis

Environmental analysis
Industry analysis
Operational review of OGDCL
Financial analysis
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The under mentioned documents are essential to perform comprehensive analysis of financial position,
performance and cash position of OGDCL

1. Financial plan-Year 2011 to 2015
2. Audited financial statements-Year 2012
3. Internal audit reports
4. Management letter /. Letter of internal control from external auditors
5. 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
worlds top two energy sources through 2040.

Pakistans 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.

Pakistans 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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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 porters 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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9 Pakistan Refinery Limited
10 Pakistan State Oil Company Limited
11 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
Categories Number of
shareholders
Number of shares % age
1 Individuals 21,706 32,026,532 0.74
2 Investment companies 7 646,253 0.02
3 Insurance companies 12 17,019,982 0.40
4 Joint Stock Companies 129 1,445,750 0.03
5 Banks, DFIs, NBFIs 14 10,649,548 0.25
6 Modarabas and Mutual Funds 71 51,055,638 1.19
7 Foreign investors 117 524,981,937 12.21
8 Co-operative societies 1 3 0.00
9 Charitable Trusts 21 970,583 0.02
10 Others 120 5,334,054 0.12
11 OGDCL Employee Empowerment Trust 1 432,189,039 10.05
12 Government of Pakistan 1 3,224,609,081 74.97
Total 22,200 4,300,928,400 100.00

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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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
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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
Wells drilled 17
Oil & Gas discoveries 2
Crude oil sold in thousand BBL 13,713
Gas solid in MMcf 381,863
LPG sold in M.Tons 75,005
Sulphur sold in M.Tons 21,400
White Petroleum Products sold in thousand BBL 19

5.7 Key strategic assets of OGDCL

A. Plant & Machinery
B. Rigs
C. Pipelines
D. Development and production assets
E. 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 FY 2012 FY 2011
Crude oil barrels per day 37,615 37,370
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Gas MMcf per day 1,091 1,013
LPG 205 195

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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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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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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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.


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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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.


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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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.


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.


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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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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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.


Point no 13: Sales and profitability of OGDCL

Non-financial sales data Page 30 of annual report

Year 2011-12 Year 2010-11
Quantity sold
Crude oil sold in thousand BBL 13,713 13,224
Gas solid in MMcf 381,863 362,924
LPG sold in M.Tons 75,005 71,061
Sulphur sold in M.Tons 21,400 34,400
White Petroleum Products sold in thousand BBL 19 30

Financial sales data-Page 106 of annual report

Year 2011-12 Year 2010-11
Rupees Rupees
Gross sales
Crude oil 109,413,764,000 84,825,937,000
Gas 104,924,338,000 93,823,246,000
Gasoline 172,820,000 75,940,000
Kerosene Oil 48,697,000 47,045,000
High speed diesel oil 1,823,000
Naphtha 151,162,000
Liquefied petroleum gas 6,464,469,000 5,424,125,000
Sulphur 600,142,000 880,162,000
Other operating income 96,506,000 47,478,000
221,720,736,000 185,276,918,000

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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

Financial Analysis Report OGDCL

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