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Farhan Mahmood
Two important developments that took place recently have direct implications for the index heavyweight E&P stocks. One is related to Oil and Gas Development Company Limited (OGDC) as government is planning to issue its convertible bonds (CB) to foreigners. The other relates to Pakistan Oilfields Limited's (POL) Bela Well 1 which might be tested as a small oil and gas producer.
Both are positive developments and may support the share prices of POL and OGDC. The brokerage house maintains Hold stance on OGDC while on POL at current levels it recommends Buy.
Effort to tap inflows
The cash-starved government, according to news items, is planning to issue OGDC's convertible bonds (CBs) worth $400-500mn. Two years back the government short-listed JP Morgan, Barclays Plc and ABN Amro as lead managers for the transactions but was not able to implement its plan.
The government bond plan in the absence of full time finance minister shows that the government is facing severe liquidity shortage due to absence of non-IMF inflows.
If bond sale materialises soon, the government will be able to reduce its financing needs and enhance the forex reserves which may also support local currency. Last year the government floated 2 TFCs worth more than Rs160bn to ease mounting burden of circular debt.
Implications for OGDC
The bond plan, if realised, will improve future capex of the company.
During Jul-Dec 2009, the company has incurred capex of Rs9bn, 31 per cent lower than last year. And any reduction in capex bodes negative for further earnings of the company. The government has already granted 4 provisional blocks to OGDC which require additional capex.
Payout will improve: So far this year the company has paid 38 per cent of the profits versus historical 5 year average payout of 85 per cent. The funds raised through bonds may help increase payout.
Dilution in earnings: On the other side, the negative implication is the value of shareholders equity may reduce due to stock dilution once bond is converted into shares.
Bela seen delivering
Risks of a dry well have reduced after 5 months as POL's Bela Well 1 is again going through testing phase.
Though the company has not yet issued any official notification, however according to industry discussion, the well might be tested as a small oil and gas pressures. The market may react positively, it is believed, on that due to the fact that there was a growing concern that this well in which POL holds 100 per cent stake might prove unsuccessful.
The company has been drilling this well for almost two years. The well was spudded in March 2008 with target depth of 5,065 meters. The well was confronting higher water pressures which led to unexpected delay in drilling work. Our estimate is that POL has already incurred exploratory expenditure of Rs2-2.2bn during last 2 years. And if the well was found dry, there was a chance of one time negative earnings impact of Rs6 per share. This risk is now almost over, it is understood.
Since Bela risk is getting over POL is now even more attractive at current levels. Analysts continue to rank POL as one of top 5 picks based on near-term earnings growth potential led by Tal block. With earnings likely to double by FY12 and oil production at 20 month high it is suggested to investors to take exposure in POL which is trading at FY10 and FY11 PE of 7.8x and 5.7x, respectively.
Writer is a research analyst at Topline Securities
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