Accelerated Development And New Discoveries May Boost Future Production, But Operational Challenges Could Impact Profitability

Key Takeaways

• Extensive exploration and new discoveries position OGDCL for future production growth and revenue increases.
  
• Investments in development projects and production optimization may enhance production capacity and long-term earnings potential.
  
• OGDCL faces production challenges, increased operating expenses, and risks from exploration projects, impacting profitability and revenue stability amid forced gas curtailment and exchange losses.

Catalysts

Explores for, develops, produces, and sells oil and gas resources in Pakistan.

• OGDCL made 5 new gas condensate discoveries during the year, indicating potential for increased future production and revenue growth from these new reserves.
  
• The company's extensive exploration efforts, covering 39% of Pakistan's total exploration acreage, suggest a strong pipeline for future oil and gas discoveries, which could positively impact future revenue.
  
• OGDCL is accelerating development projects such as the KPD-TAY compression project, expected to add 100 million scf of gas by 2026, potentially boosting future production levels and revenue.
  
• Recent developments and optimization efforts, including new well injections and installation of electrical submersible pumps, are aimed at enhancing production capacity, which could lead to higher future earnings.
  
• The utilization of advanced production optimization techniques and increased seismic data acquisition reflects a commitment to enhancing operational efficiency, which can improve net margins in the long term.

Oil and Gas Development Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Oil and Gas Development's revenue will grow by 1.7% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 44.7% today to 39.9% in 3 years time.
• Analysts expect earnings to reach PKR 188.9 billion (and earnings per share of PKR 42.58) by about February 2028, down from PKR 201.0 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.6x on those 2028 earnings, up from 4.2x today. This future PE is greater than the current PE for the GB Oil and Gas industry at 5.4x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 28.97%, as per the Simply Wall St company report.

Oil and Gas Development Future Earnings Per Share Growth

Risks

• OGDCL faced significant challenges due to severe forced gas curtailment, which resulted in unexpected shutdowns of wells and impacted existing reservoirs, particularly aging wells, potentially affecting production volumes and, consequently, revenue and net profit margins.
  
• Operating expenses increased by 32% partially due to additional wellhead fees and higher security costs, which could negatively impact net profit margins and overall profitability.
  
• Net profit after tax decreased by approximately 7%, influenced by lower other income and significant exchange losses, suggesting potential volatility in earnings.
  
• OGDCL has undertaken substantial exploration and development projects, which, while promoting future growth, carry execution risks that may affect timelines and financial outcomes, potentially impacting future earnings.
  
• The pressure on the company's production from LNG influx in the system, leading to reduced intake of indigenous gas, could affect revenue stability and production forecasts.

Valuation

• The analysts have a consensus price target of PKR279.0 for Oil and Gas Development based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of PKR355.0, and the most bearish reporting a price target of just PKR210.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be PKR472.8 billion, earnings will come to PKR188.9 billion, and it would be trading on a PE ratio of 13.6x, assuming you use a discount rate of 29.0%.
  
• Given the current share price of PKR198.51, the analyst price target of PKR279.0 is 28.8% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.