financial analysis of ogdcl

OGDCL

FINANCIAL ANALYSIS OF OGDCL

Yr 07-09

ISLAMIC INTERNATIONAL UNIVERSITY

Submitted to : PROF. WASEEM ULLAH(LUMS)

Submitted by: SEHRISH SADAQAT

MERIUM RAUF

HUMA NAYAB

KASHAF SHABIR

1 | P a g e

OGDCL

OGDCL (oil and gas Development Corporation) is the leading exploration and Production

Company in Pakistan.It was initially created as the PUBLIC sector in 1961.It was converted into

the public limited company on 23 October 1997. OGDCL is listed on all the three stock

exchanges of Pakistan as well as on the London stock exchange. Government of Pakistan has

divested 4.98% of its shareholding in October 2003 through an initial public offering. GOP now

owns 85.32% of shares of company. OGDCL contributes 24% of country’s total natural gas

production and 62% of its oil production.

MAIN PRODUCTS: OGDCL deals in the production and exploration of crude oil, gas, LPG,

and sulphur. OGDCL is the main supplier of crude oil, petroleum, gas and LPG to Shell, PSO,

Attock Refinery, Pak refinery. So OGDCL is the main leader of the gas and oil exploration and

enjoys autonomy.

Company has productions from 3 sorts of fields 100% own, joint venture and shares in non

operated fields. Currently OGDCL has 44 developmental and production mining leases. OGDCL

is following the strategy of sustainable growth with the primary objective to enhance its reserve

and production profile and ultimately maximize the value for shareholders. Main strategy is to

accelerate the production and cut the cost that can allow the company to capitalize on the

economic growth.

RISK: OGDCL as an oil and gas explorer is exposed to certain operational and non operational

risk. Crude oil pricing, exchange rate, exploration and drilling risk and environmental risk

constitute the composite risk of OGDCL. However competitor risk is quite low as the allocation

of resources, pricing and sales contract are made by the Pakistan government, attributing the

highest profit compared to their competitors.

LEVERAGE: OGDCL is self sufficient in financing through profits and internal investment

however because of circulated debt and financial crises of their buyer, OGDCL has to take loans

to continue exploration. Since it earns huge profit, OGDCL has the excess to the funds at the

desired rate pro OGDCL in compliance with the government’s regulatory requirements of

Environmental Protection Act 1997.

INFORMATION TECHNOLOGY: Oracle E&P system, is used to bring more efficiency,

transparency and control.

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OGDCL

REPUTATION OF OGDCL: The main sponsor of OGDCL is Pakistan government that

enhances the management reputation and also the biggest public sector of oil and gas with

highest share in the country production ascertain the reputation of OGDCL in the market.

CAPITAL: OGDCL financing by equity is in a high proportionate that not only provides

flexibility and cushions in decisions but also the opportunity to generate new capital is also

commendable.

PRODUCTION AND SALES: Sale revenue in FY09 increased by 3.9% to RS 130.8 billion

compared to Rs 125.908 billion in2008 and 100.197 billion in 2007. Increase in sales was mainly

due to increase in realized prices and enhances sales volume. However in 2009 the realized

prices and sales volume of LPG and other petroleum product declined resulting in the net

increase of only 4.946 billion. Profit for the whole year increased by 25.3% to Rs 55.540 billion

compared to 44.338 billion in FY08 due to decrease in provision for taxes and royalty. Because

of increased profit the earning per share has increased to Rs 12.91 compared to Rs 10.31 in 2007

and 2008.Production of crude oil in company 100% own fields and share operated JV however in

year 2009 was less than year 2008 by 3.3%.Gas production and LPG production also decreased

due to security issues and other mechanical problems as was anticipated for year 2009.

PEER GROUP SELECTION: Among the all oil and gas producers peer group is selected on

the basis of sales as competition and strength of market could be determined through sales thus,

indicating the demand and profitability.

PAK PETROLEUM LIMITED

ATTOCK REFINERY

ATTOCK PETROLEUM

SHELL

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OGDCL

LIQUIDITY

Liquidity

2007 2008 2009

Current Deviation Current Deviation Current Deviation

Current ratio 6.2 -0.30 3.7 -2.50 4.1 0.40

Quick or acid test ratio 5 -1 3 -2 3.3 3

2007 2008 200902468

LIQUIDITY RATIOS

Current ratio Quick or acid test ratio

The current ratio shows the ability of the business to generate cash to meet its short-term

obligations. The overview shows that they have not managed to create a good combination of the

current assets and liabilities making it financially not sound and liquid enough to cover its

liabilities. There is however a considerable appreciation in the year 2009 as compared to the past

years. This phenomenon may be attributed to the considerable increase in current assets with less

proportionate change in liabilities. In 2007 the ratio has depleted, decreasing by 0.3 and the

main contributors to this were the decrease in current assets and increase in current liabilities as

there is a 55% increase in trade and other payables and a 5.65% reduction in other financial

assets. In 2008 ratio has depleted, decreasing by a greater percentage of 2.5. Main reason for the

depletion is 53% increase in payables and provision for tax being made. However, in 2009 the

ratio has appreciated showing the 0.4 from the previous year which is because of reduction in

current liabilities. This shows it needs to improve its liquidity position by increasing its current

assets or reducing its current liabilities further so that it has sufficient cash at hand to meet its day

to day expenses.

The acid test ratio shows how a firm is able to cover its current liabilities with the most liquid

of its assets excluding the inventories which are not so easily converted into cash. As it can

already be seen from the current ratio, the firm is not in a good liquidity position. This can be

due to the fact that current liabilities have risen but the severity can also be attributed to the high

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OGDCL

levels of inventory held by the enterprise. In 2007 ratio has depleted and the main reason is

because of a 19% increase in inventory and because tax had not been deducted in 2007 from

current liabilities. However, in 2008 ratio has depleted by a greater 1%. Main reason for the

depletion is that there is a 26% increase in inventory and because 39% receivables have

decreased. In 2009, however the ratio has appreciated due trade debt being increased.

This concludes that OGDCL has not been good on the whole, because of excess inventory that

makes up most of its current assets and because current liabilities have not decreased by a greater

percentage. Therefore, quick assets, that are most required for liquidity, have not been able to

cover up the current liabilities sufficiently.

CROSS SECTIONAL ANALYSIS

Current Ratio

2007 2008 200901234567

OGDCLPEER

2007 2008 20090

1

2

3

4

5

6

OGDCLPEER

Profitability ratios

2007 2008 2009

Current Deviation Current Deviation Current Deviation

Gross profit 70 -2 70 0 70 0

Net profit 46 -2 40 -6 43 3

5 | P a g e

YEAR OGDCL PEER Reasons

2007 6.2 2.3 As compared to peer group ,

OGDCL is more liquid BUT trend

appears to change because of recycled debt

2008 3.7 1.8

2009 4.1 2.01


2007 5 1.85 As compared to

peer group ,

OGDCL is having

higher level of

liquidity

2008 3 1.36

2009 3.3 1.43

OGDCL

Return on equity 47 -5 47 0 47 0

Return on Investment 49 -5 59 10 50 9

PROFITABILITY

2007 2008 20090

1020304050607080

PROFITABILITY RATIOS

Gross profitNet profitReturn on equityReturn on asset/Investment

Axis Title

Gross profit margin is a measure of profitability of a business; a measure of the ability to pay

overhead since all costs associated with obtaining and selling is subtracted out. It measures the

efficiency of the purchasing and marketing functions. According to the trend, it is observed that

sales has increased continuously by 3.7%, 25% and 4% in three of the years but the increase has

been counter by increased cost of good sold by 13%, 23% and 4%. In 2008, cost of good sold

increased the most with 57% increase in royalty and 35% increase in transportation expenses. So

the trend analysis shows that OGDCL has maintained the profit by maintaining every cost factor.

Net profit margin shows what amount of pure revenues firm is earning. The ratio for OGDCL

shows that it had been earning high profit in 2007 but the ratio since then declined in 2008 and

then increased in 2009. In 2007, Net income has decrease by 3 lac , attributed to the increase in

finance cost of 4 lac and 100% rise in operating expenses contributing deviation of -2 times from

year 2006.In 2008 the ratio has declined further with the deviation of -6 times from year 2007.

The sales had risen more than normal but the cost of earning and taxation litigation in 2008 has

caused the downfall. In 2009, rise in the profit per unit of sales has been observed which is

attributed to increase in net income by 12% by the decrease in royalty and taxation that now

constitutes 12% and 19% of sales.

Return on equity trend shows, investors investing in OGDCL are getting the same return for the

3 consecutive years. The ratios indicate the same return of 47% on the investment of common

shareholders which shows the management constant operational efficiency to generate the same

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OGDCL

return from common share holders equity. In 2007, net income decreased by 0.7% with 6%

increase in equity, attributing the decrease in the return from 2006.In 2008 and 2009 change in

net income is same as that change in equity that shows that OGDCL has developed efficient

policies that has equalized the same return in 3 years.

Return on investment measures the performance of the equity (assets) employed to generate the

income, the trend shows that the performance of the equity decrease in 2007. Then increase the

most in 2008 and then decreased. In 2007, performance of assets has decreased because of 7%

decrease in EBIT and 3% increase in assets. EBIT has decreased because of 101% increase in

operating expenses and increase in transportation expense by 1.8 million. However In 2008

performance of assets to generate income has increased since the operating income has increased

by 36% with 11% increase in assets.36% increase in EBIT in 2008 is attributed to 25% increase

in sales,4.6 million increase in other income and 10% decrease in operating income, In 2009,

ratio has decreased as the operating income has decreased by 5% while the assets have increased

by 18%,decrease in operating income is attributed to increase in operating expenses, increase in

exploration expenses.

Overall trend shows OGDCL is profitable because of better management of cost factors and

increasing demand.

DU PONT ANALYSIS:

2007 2008 2009

Net profit margin 0.45 0.39 0.42

Total assets turn over 0.82 0.96 0.86

Equity multiplier 1.28 1.28 1.37

ROE 0.47 0.47 0.47

As the data shows that the factor contributing in more proportion to the return on equity is the

equity multiplier (a measure of company leverage). It means that the company has financed more

of its assets through debt to generate the return on assets employed. Even in 2008 and 2009,

equity multiplier is proportionately more than other contributing factors.

COMPONENT ANALYSIS: OGDCL net profit margin, increased in 2007 that shows the

effective planning and management while the decline is observed in 2008 (because of tax) but

they have increased their profit margin in 2009 through effective management of operating cost.

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OGDCL

OGDCL total assets turn over has increased the most in 2008 show casting the effective

utilization of the assets employed. In 2008 the sales have increased by 25% and assets have

increased by 16% depicting the profitability. Liquidity analysis shows OGDCL is doing high

level of debt financing however the ratio has decreased in 2009 showing that OGDCL is paying

off debt.

CROSS SECTIONAL ANALYSIS:

Return on Equity

2007 2008 20090

102030405060

47 47 47

33.23

48

33.5

RETURN ON EQUITY

ogdcl peer

Return on Investment:

2007 2008 20090

10203040506070

4959

50

22.2229.1

23.28

RETURN ON INVESTMENT

ogdcl peer

ASSET UTILIZATION

Asset Utilization

2007 2008 2009

Curren

t

Deviatio

n

Curren

t

Deviatio

n

Curren

t

Deviatio

n

8 | P a g e


2007 47 33.23 OGDCL return on equity is more that of

their peer group in 2007 that return on

equity is highest that shows the effective

policies and operational

management. In 2008, ratio is lower

because of tax litigation charges. But

the ratio again is higher in 2009

2008 47 48

2009 47 33.50%


2007 49 22.22 OGDCL shows better performance on the investment or asset employed

then that of the entire peer group in

all of the three years. It shows

OGDCL excellent performance of generating the

highest return on the assets

2008 59 29.1

2009 50 23.28

OGDCL

Accounts receivable 95.79 -12 106.14 10 141.13 35

Total asset turnover 80 0 90 10 79 -11

Total stock turnover

382.227

4 -27

306.368

1 -76

302.610

3 -4

2007 2008 20090

100200300400500

TRADING RATIOS

Accounts recievable Total asset turnoverTotal stock turnover

The total asset turnover shows how a firm is performing in terms of economic utilization of

assets. It shows how a firm is using its assets to earn revenues. In the case of OGDCL, it has not

been a favorable situation. The company has been facing a low asset turnover under the years of

review. A regular decline can be seen which can be improved if the current asset can be

liquidated in time. The revenue generation as is evident should also be raised. However, there

has been no deviation in 2007 because sales increased by 3.62 and even totals assets increased by

6.61% comparatively. However, in 2008 the deviation is an increase of 10 times in the ratio.

Annual sales have increased by 25.12% and total assets have increased by 16.4%; thus showing

the effective utilization of assets and effective pricing strategies used. These both are responsible

for the increase in the ratio. In 2009, the change is a decrease of 11 times in the ratio. This is

accountable to the annual sales that have increased by 4.12% whereas total assets have increased

by 18.21%; therefore assets increased more in comparable with sales showing high profit margin

of company in this year.

In 2007, ratio decreased by 27 times showing poor sales and excess inventory as thus as average

inventory has increased by 21.5% but cost of goods sold has increased by 13.4%; the inventory

increased relatively more than COGS. In 2008, however the change is a decrease of a greater

percentage of 76 times. Average inventory has increased by 54.06%. Cost of goods sold has

increased by 23.49% as royalty, operating expenses and transportation charges increased since

previous year; the inventory increased relatively double than that of COGS. However, the change

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OGDCL

in 2009 is a decrease of a lesser percentage of 4 times. Average inventory has increased by

5.19%. Cost of goods sold has increased by 4.61%; the inventory increment is almost same as

COGS thereby depicting low increase in surplus stock than earlier years.

In 2007, the deviation of the accounts receivable turnover ratio depicts that the proportion of

sales with comparison to account receivables is less thus showing that most transactions

happened on credit and are not efficient in collecting back debts, as the ratio decreased 12% than

previous year. However, average receivables have increased 34.6% and sales have increased by

3.62%. The deviation in 2008 is an increase of 10 times in the ratio. The average receivables

have increased by 3.64% but sales have increased by a larger percentage that is, 25.12%; thus

showing that average receivables turnover in days as decreased from approx. 4 days to 3 days

and sales have increased in greater proportion. Deviation in 2009 is an increase of 35 times in the

ratio. Average receivables have decreased by 11.14%. However, sales have increased by a very

lesser percentage, 4.12%; therefore most sales took place on cash though sales increment isn’t

much and turnover days have decreased from 3 days to 2.5.

Overall, OGDCL earlier illustrated high credit sales but with improvements it led to effective

turnover of receivables and few credit sales. This proves that it has been in a better capital/ debt

position as it lends less debt in the form of accounts receivables. On the other hand, OGDCL has

illustrated low stock turnover thereby implying that company has had less sales and excessive

inventory as thus. Therefore, this means it needs to efficiently manage its stock by turning stock

into relative sales and it exhibited effective utilization in 2007 and 2008 with increasing sales

and total assets respectively whereas in 2009, more asset investment than utilization of them into

high sales. This show there has been inefficiency in utilization of assets recently and concludes

that assets need to manage efficiently to give productive results.


Accounts receivable turnover

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OGDCL

2007 2008 20090

20406080

100120140160

OGDCLPEER

2007 2008 20090

20

40

60

80

100

OGDCLPEER

Stock turnover

2007 2008 20090

100

200

300

400

OGDCLPEER

LEVERAGE

Leverage 2007 2008 2009

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YEAR OGDCL PEER Reasons2007

95.79 82.68Overall OGDCL

demonstrated that among peer group,

management is efficiency to

carry out sales on credit

2008106.14 106.98

2009

141.13 91.88


2007

80 34.28

Overall OGDCL shows

better use of assets in

comparison to peers

2008

90 34.292009

79 30.22


2007382.2274 46.44438

OGDCL

shows

better

inventory

turnover

2008 306.3681 71.392

2009

302.6103 126.358

OGDCL

Current

Deviatio

n Current

Deviatio

n Current Deviation

Debt ratio 22.21 1.58% 27.51 23.86% 29.11 5.82%

Interest coverage

ratio 137 -97.90% 147 7.30% 88 -40%

2007 2008 20090

20406080

100120140160

Debt ratioInterest coverage ratio

According to the debt to assets ratio OGDCL has weak position in the consequent 3 year.

OGDCL seems to take the increasing debt that can trouble the company in the future because of

the increasing finance cost which can jeopardize the company investment opportunities by

reducing the net profit. In 2007, 23% of the company assets have been financed by the creditors

of the company which is 2% more than previous year. In 2007 debt has increased by 8.2% with

the subsequent increase of 55% in trade and other payables. In 2008 the debt ratio has increased

more with 45% increase in debt and 18% increase in assets as that of 2007. The debt increase is

proportionally more than that of assets. In 2008 the debt increase was because of 92.75%

increase in current liabilities and 30.68% in fixed debt. In 2009, 29% of the total assets OGDCL

is financed by the creditors, with the statistic of 23.69% increase in debt and 17% increase in

assets. The main reason for the increased debt ratio is the “RECYCLING DEBT” which has

increased OGDCL payables. All of the buyers of the OGDCL (i.e. Pakistan petroleum) and

others have due payment from (Wapda) and other consumers that are facing financial crunch,

thus hammering the payments of OGDCL and increasing payables.

Interest coverage ratio measures the earning available to cover the interest payments. OGDCL

trend shows the ratio to increase in 2008 and then decrease in 2009.In 2007 , the ratio has

decreased or the ability has decreased because of decrease in EBIT by 7% and increase in

interest expense by 4400%.sine the debt has increased proportionally more that has jeopardize

OGDCL ability to cover interest expense with operating income. However in 2008 , interest

12 | P a g e

OGDCL

coverage ratio has increased by 7.30% with 28% increase in EBIT and only 18% increase in

interest expense. Increase in EBIT in 2008 is attributed to 25% increase in sales and minimal

decrease in operating expenses as that of 2007. In 2009 the ratio has decreased showing the

deviation of 40% since the EBIT has only decreased by 4% while the interest expense has

increased by 72% which is 94% more than decrease in EBIT.

So, overall trend of leverage ratio shows that the debt financing of OGDCL is increasing

because of recycling debt that is also hammering the ability of OGDCL to finance through

internal investment.


Debt to asset ratio

2007 2008 20090

102030405060

22.21 27.1921.28

52.83 52.9 54.24DEBT TO ASSETS RATIO

ogdcl peer

Interest coverage ratio

2007 2008 20090

40

80

120

160 137 147

88

127 125108

INTEREST COVERAGE RATIO

ogdcl peer

COMMON SIZE INCOME STATEMENT

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2007 22.21% 52.83 Overall OGDCL analysis shows

less debt financing then peer group,

even though OGDCL debt ratio

is increasing because of

recycled debt

2008 27.51% 52.92

2009 29.11% 54.24


2007 137 127 As compared to peer group, OGDCL

can cover its interest expense but decreases in 2009

because of reduced volume of sales and

production

2008 147 125

2009 88 108

OGDCL

INCOME STATEMENT 2009 %of sales 2008 %of sales 2007 %of sales

sale-net 1308295

79 1001259083

04 1001002611

91 100

royalty

-1515566

7

-11.584281

72

-1732018

7

-13.756191

17

-1087744

3

-10.84910

61

operating expenses

-2267389

3

-17.330861

39

-1961334

5

-15.577483

28

-1849738

8

-18.44920

03

Transportation charges-

1522489

-1.1637192

53-

1472615

-1.1695932

3-

1087931

-1.085096

82

-3935204

9

-30.078862

36

-3840614

7

-30.503267

68

Gross profit 9147753

069.921137

648750214

769.496724

386979842

969.61659

671

other income 33708232.5764991

57 38655363.0701199

82 36152313.605812

941

Exploration and prospecting expenditure

-7459560

-5.7017381

37-

6612836

-5.2521047

38-

7406280

-7.386985

86

General and administration expenses

-1332982

-1.0188689

82-

1248640

-0.9917058

37-

1285476

-1.282127

2

Provision for impairment loss -319283

-0.2535837

51

Finance cost -926027

-0.7078116

49 -536799

-0.4263412

21 -449561

-0.448389

85

Worker's profit participation fund-

4259364

-3.2556582

64-

4387411

-3.4846081

32-

3213617

-3.205245

19Shares of profit in associate-net of taxation 57503

0.043952599 44680

0.035486142

Profit before taxation 8092792

361.857512

367830740

462.193994

776105872

660.89966

156

Taxation

-2538828

2

-19.405613

16

-3396929

3

-26.979390

49

-1542876

2

-15.38856

84

Profit for the year 5553964

142.451899

24433811

135.214604

34562996

445.51109

3

COMMON SIZE BALANCE SHEET

SHARE CAPITAL AND RESERVES 2007 % 2008 % 2009 %

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OGDCL

Share capital 43,009,2

8433.253

35743,009,2

8428.238

0943,009,2

8424.163

551

Capital reserve 2,438,22

81.8851

573 35030642.2999

648 36583182.0553

226Unappropriated profit

55,169,140

42.654956

63902995

41.956024

79503794

44.666961

100,616,

65277.793

47110,415,

34372.494

079126,171,

39670.885

835NON CURRENT LIABILITIES Deferred taxation

11,023,916

8.5233275

12131932

7.9653173

17710497

9.9501425

Deferred employee benefits

1,423,132

1.1003186 1528444

1.0035122 2008499

1.1284184

Provision for decommissioning cost

5,151,807

3.9832069 6795141

4.4614043

10814506

6.0758247

17,598,8

5513.606

8532045551

713.430

2343053350

217.154

386CURRENT LIABILITIES Trade and other payables

11,122,665

8.599677

17215555

11.303011

18747328

10.532657

Provision for taxation 4223048

2.772676 2540170

1.4271228

11,122,6

658.5996

772143860

314.075

6872128749

811.959

779

Total liabilties 28,721,5

2022.206

5341,894,1

2027.505

92151,821,0

0029.114

165Total Capital and Liabilities

129,338,172 100

152,309,463 100

177,992,396 100

NON CURRENT ASSETS 2007 % 2008 % 2009 %Fixed assets Property, plant and 216002 16.700 232296 15.247 284821 15.996

15 | P a g e

OGDCL

equipment 01 562 31 362 94 793Development and production assets

28749993

22.228544

36808014

24.15988

49057766

27.552897

Exploration and evaluation assets

6365706

4.9217535

7672444

5.0360046

8779699

4.9310468

567159

0043.850

859677100

8944.443

246863196

5948.480

737

Long term investments 294593

82.2777

019290313

31.9055

455296013

21.6625

342

Long term loans and receivables 111775

50.8642

112180662

01.1858

212184970

71.0388

729

Long term prepayments 398210.0307

883 1089370.0715

036 853570.0479

401

608194

1447.023

561725287

7947.606

117912148

5551.230

084 CURRENT ASSETS Stores, spare parts and loose tools

13178295

10.189022

16615095

10.905742

17464351

9.8087112

Stock in trade 93788

0.0725138 151782

0.099626 108301

0.0608264

Trade debts 278735

1521.550

881407052

9926.717

963561400

9231.530

628

Loans and advances 153865

71.1896

387233903

71.5352

867263396

51.4793

451Deposits and short term prepayments 292928

0.2264822 679165

0.4457873 419621

0.2356767

Interest accrued 253222

0.1957829 180295

0.1183412 27156

0.0152519

Other receivables

1063389

0.8221772 638291

0.4189586 979319

0.5500266

Other financial assets 135539

5910.479

473102075

166.6999

639508791

72.8575

874

Advance tax 595071

34.6008

946

Cash and bank balances 472029

23.6495

738830654

85.4522

15397381

82.2318

627

685187

5852.976

439798230

2852.393

883868345

4048.769

916

Total assets 129338

172 100152351

807 100178049

395 100

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financial analysis of ogdcl

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