By: BMA Capital Management Limited

 

We re‐iterate our ‘BUY’ call on Oil and Gas Development Company (OGDC) as our preferred play in the E&P sector where our conviction on the stock is based on

i) attractive valuation (wide discount over peers and market),
ii) big ticket projects in pipeline (11%‐12% of current production) and
iii) E&D drilling in high prospect areas. At last closing, OGDC’s FY16 P/E of 8.0x is at discounts of 14% and 11% over comparables and KSE100 P/Es, respectively compared to last five year average premium of 11% and 12%, respectively. Also, OGDC is currently trading at an implied oil price of USD30/bbl, lower than USD32‐35/bbl of comparables (POL and PPL).

OGDC underperformed KSE100 by a steep 23% FY16TD owing to delays in completion of key projects and 35%YoY decline in 1QFY16 earnings. Going forward, we expect the sentiment to improve owing to expected completion of major development projects and outcome of exploratory drilling. Any recovery in oil prices following the potential decline in shale oil production and recovery in global macros will remain an upside trigger to our base case assumption of USD45/bbl in FY16. At our reserve based DCF TP of PKR203/sh, the stock offers an attractive upside of 46% plus a decent DY of 6%.

Market overpricing the negatives: In addition to steep decline in oil prices (down 33% on average), persistent delays by OGDC on completion of various key projects, mainly KPD‐ TAY, Sinjhoro, Uch and Nashpa, kept the sentiment negative in FY15.

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Also, given the nominal size of finds ranging from just 1%‐2% of OGDC’s current production base, the discovery announcement also failed to create any excitement in the stock. A review of the current valuations suggests that the current stock price has more than priced‐in the negatives where, as of last close, the FY16F P/E multiple of OGDC at 8.0x is depicting a discount of 14% and 11% over comparables and KSE100 P/Es compared to last five year average premium of 11% and 12%, respectively. We believe timely development of aforesaid fields and sustainability of oil prices above USD45/bbl will remain critical to the improvement in sentiment, going forward.