INDUSTRY ANALYSIS

Until 1999, the government tightly controlled the oil and gas industries of Pakistan. No decision
could be made without referring to the higher instances, and when decisions were made, they
were often based on political as opposed to economic considerations. Since early 2000, an
ambitious, pro-market, reform program is being implemented, and gradually, the straightjacket
under which the industry used to operate is being dismantled. As a result, the sector has changed
dramatically over the past three years, and Pakistan now leads South Asia in sector reform.
The government actions have focused on promoting private investments in the upstream,
deregulating most of the market for petroleum products, establishing a regulatory agency for the
gas sector, and introducing market-related price caps for petroleum products. The government’s
long-term goal is to create a competitive, efficiently-run, financially-viable, and largely
privatized oil and gas sector providing supplies to a large share of the population. The
government recognizes its primary role as that of a policy formulator to ensure a level playing
field, and to act upon anticompetitive behavior. The oil and gas sector has a considerable impact
on the economy – the sector attracts by far the highest level of foreign direct investments in the
country, and raises significant tax income for the government. At the same time, high imports of
crude oil and petroleum products affect the balance of payments adversely. In addition, the
annual economic cost of guarantees and subsidies in the sector is significant as it is estimated at
about Rs. 33 billion (in the form of direct and implicit subsidies, and foregone taxes).
Substantial progress has been made in the restructuring and reform of the oil and gas sectors,
deregulation of prices, and privatization of selected assets. The reforms have enhanced
transparency, making decision makers aware of the various aspects of the business. This review
documents the accomplishments to date, and attempts to identify measures that merit priority
attention with respect to natural gas, petroleum downstream, and macroeconomic management.

Natural Gas

With reserves on the order of 27 TCF (equivalent to 25 years of production at current levels),
natural gas consumption is growing rapidly. The intensification of the use of natural gas will
contribute to economic growth; increase access for the poor and rich alike; and help substitute
domestic gas for imported fuel oil in electricity generation, while keeping power tariffs lower
and more stable. Presently, indigenous natural gas accounts for only 40 percent of modern
energy use, so that significant quantities of crude oil and petroleum products are imported at a
cost of about US$3 billion per year (up to 37 percent of export earnings). Argentina, with a
similar resource base, has almost 25 percent greater gas utilization. Fortunately, an ambitious
investment program in the gas sector over the past three years should lead to a significant
(approximately a 30%) increase in gas availability in 2003/04. If Pakistan could harness the full
potential of its gas resources, fuel oil imports would be reduced by 4.5 million tons per annum
for an annual savings of about US$650 million (based on 2001/02 figures). Unfortunately, the
full potential of Pakistan's gas resources has not been realized in the past due to inadequate sector
policies for example giving insufficient priority to expanding the gas market, allocating of
reserves to low value uses, uneconomic tariff policies, promoting a public-sector approach to
commercial and competitive operations, and excluding the private sector. These issues are now
being addressed. Over the past three years, a number of reform measures have been undertaken

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including: the introduction of a new Petroleum Policy with improved terms for exploration and
production; the implementation of a market-based wellhead pricing framework for the Sui field;
the adoption of a gas consumer pricing framework (however, a number of implementation
problems are still to be addressed, in order to fully implement this framework); the expansion of
transmission infrastructure; and the provision of greater managerial autonomy to the sector
entities. To harness the full potential of natural gas, the government's role in the sector is being
redefined, so that it focuses on policy formulation.
The Oil and Gas Regulatory Authority (OGRA) has been set up and is gradually becoming
operational. While OGRA’s role will become critical after the sector is restructured and
privatized, this transition period is also important for the Authority to develop its regulatory
capabilities. Unfortunately, the government retains a decisive role in determining tariffs, and in
many areas, the respective roles of the government and OGRA are defined ambiguously, a
concern for investors.

Petroleum Downstream Sector

Out of a market of 17.5 million tons, some 15 million tons of crude oil and petroleum products
are imported (net) annually. Significant achievements have been made in the last three years in
the petroleum downstream sector: fuel oil and diesel prices have been deregulated
(approximately 85 percent of national consumption); petroleum products prices are revised every
fortnight to reflect changes in international prices; distributor and retailer margins have been
rationalized; product specifications have been improved and leaded gasoline phased out; and
LPG assets have been privatized. These measures have laid the foundation for making the sector
more competitive. Notwithstanding good progress, a number of issues still remain. The refineries
benefit from a protective duty on the four main product imports, and one new refinery is the
recipient of a budgetary subsidy of about Rs. 8 billion annually (in accordance with prior
undertakings of the government). Road tankers transport most petroleum products, under an
inefficient scheme designed to equalize prices across Pakistan (the freight pool). Although
marginal improvements have been made by allowing prices of petroleum products to vary
beyond the 29 distribution depots, the cross-subsidization of transport costs applicable to primary
freight (by overcharging locations close to the refineries, and undercharging other areas) remains
significant. In addition, as a result of the regulation of freight rates, tariffs are inflated, and a
considerable surplus of road tankers has developed. Lastly, the import terminals and the major
storage depots do not operate under a transparent open access regime (it is currently under
preparation); and the level of competition is further reduced by the presence of a dominant player
with an overall 60 percent share of the market.

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 OGDCL PROFILE

Oil and Gas Development Company Limited (OGDCL) was initially created under an Ordinance
in 1961, as public sector Corporation which subsequently in pursuance of the Petroleum Policy,
1994 was converted from a statutory Corporation into a public limited joint stock Company on
commercial lines w.e.f. 23 October, 1997. On conversion all the properties , rights, assets,
obligations and liabilities of the Oil and Gas Development Corporation (OGDC) w e re vested in
the Company for having issued ordinary fully paid shares of Rs 10/- each against the capital
contribution made by the Government. Company’s Board of Directors was reconstituted by
nominating experts in different fields on its Board. In April/May 1999, Government of Pakistan
approved privatization of OGDCL and a Financial Advisor was appointed for that purpose. In
October 2003 Government of Pakistan further decided to disinvest part of its shareholding in the
Company after issuing bonus shares at three shares per one share. Initially 2.5% of the equity
with an additional green-shoe option upto 2.5% of equity was offered to general public under
IPO. The said off e r received an overwhelming response from the general public which has been
recorded as a landmark transaction in the history of Pakistan’s capital market. The Company is
now listed on all the three Stock Exchanges of Pakistan with highest market capitalization.

Vision

To be a leading, regional Pakistani E & P Company, recognized for its people, partnerships and
performance.

Mission

Our mission is to become a competitive, dynamic and growing E & P company, rapidly
enhancing our reserves through world class work force, best management practices and
technology and maximizing returns to all stakeholders by capturing high value business
opportunities within the country and abroad, while being a responsible corporate citizen

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 PAKISTAN PETROLEUM LIMITED PROFIL

Petroleum exploration in Pakistan began more than a century ago. The first well was drilled in
1866 at oil seepage of Kundal in the Mianwali District of Punjab Province, right after seven
years of World's first well. The first commercial success came with drilling of Khaur-1 by
Attock Oil Company in 1915, on a surface anti-cline in the Potohar Basin. After independence,
in 1949 Pakistan Petroleum (Production) Rules were introduced. After promulgation of the
Rules, Attock Oil Company and Burmah Oil Company established Pakistan Oil Fields and
Pakistan Petroleum Limited (PPL), respectively, as their subsidiary. PPL made the first major
gas discovery in Pakistan in 1952 at Sui with estimated recoverable reserves of about 11.7 Tcf of
Gas (more than 2.0 Billion Barrels of Oil Equivalent). The historic event marked the beginning
of PPL’s journey for the quest of the hydrocarbons and was also the first major milestone of the
oil and gas industry in Pakistan.

Vision

To maintain PPL’s position as the premier producer of hydrocarbons in the Country and at the
same time make a strategic transition to become an international Company, exploiting oil and
gas resources beyond the borders of Pakistan, resulting in value addition to shareholders’
investment and to the nation as a whole.

Mission

Program in the most efficient manner on the local as well as international horizons through a
team of professionals utilizing the latest developments in the exploration and production
technology and maintaining the highest standards of health, safety and environment protection.

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FINANCIAL RATIOS & ANALYSIS

AUDITOR’S REPORT ANALYSIS OF OGDC & PPL

We have analyzed the financial statements of both the companies and came to conclusion that
auditor’s reports of both the companies are unqualified reports.
Which means that financial statements of both the companies are in accordance with Generally
Accepted Accounting Principles and give the information as so required by the Companies
Ordinance 1984? The information was fairly presented and there were no errors or evidence of
window dressing. This kind of opinion is in best favor of the company because this can build
strong image of the company and it would be easy for professional analyst to draw conclusion.
This can build a strong image in the minds of stakeholders and strengthen the ties with the
creditors. Auditor report of OGDC and PPL also clearly states that business conducted,
investments made and expenditure incurred during the year were in accordance with the objects
of the company.

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LIQUIDITY MEASURES

Working Capital :( Current Assets-Current Liabilities)

Year
Company 2008 2007 2006
OGDC 57,022,735 57,396,093 61,785,930
PPL 24,282,904 25,877,363 32,733,892
Rs In 000s

Working capital shows the liquidity position of a firm. It should not be so high. High working
capital means firm is following conservative policy or in other words means they are keeping
most of the liquid assets with them which potentially can generate returns if invested. While low
working capital of negative working means firm if following aggressive approach and utilizing
most of the liquid assets here firm can generate high returns associated with risk. Similarly in
this case working capital of OGDC is decreased in the three years which means they are utilizing
the resource while we see that working capital of PPL has also decreased in three years which
may be a good sign for the two firms in both firms’ balance sheet we see that other financial
assets has decreased, this means that their investment has decreased, we may tribute this increase
in working capital to increase in liabilities here.

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 Year
Company 2008 2007 2006
OGDC 3.44 5.73 6.64 Current Ratio :
PPL 2.61 4.24 3.03 ( Current Assets ÷
Current Liabilities)

The current ratio or sometime called working capital ratio is another measure of liquidity
position of a firm, which means how much a company is capable of paying its short term
obligations. So this ratio might be of value to suppliers or those persons who have short term
dealing with the firm. In our case current ratio of OGDC has decreased which was quite obvious
because the firm’s working capital has decreased but still is in a good position as compared to
this sector. Current ratio of PPL has also decreased in these three years but is low than that of
OGDC. This ratio has decreased but is not alarming for the firm. This ratio has decreased
because both the firms’ current liabilities have increased in more proportion than increase in
current assets.

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 Year
Company 2008 2007 2006
OGDC 3.68 6.16 6.67
PPL 2.78 4.35 3.24
Acid-Test Ratio :{ (CA-Inventory-Prepaid Expense-Provision for Bad debts) ÷ CL}

OGDC 2008 2007 2006

Current Assets 78,254,089 68,518,758 72,677,371
Current Liabilities 21,231,354 11,122,665 10,891,441
Inventory 151,782 93,788 65,608
Prepaid Expenses 678,789 292,928 300,260
Provision for bad debts 4,325,082 4,391,070 177,737
Cash and Cash equivalents 6,715,048 4,720,292 1,186,870
Other financial Assets 10,207,516 13,553,959 31,209,932

PPL
Current Assets 37,862,020 33,592,403 27,053,297
Current Liabilities 13,579,116 7,715,040 8,332,205
Inventory 1,604,385 1,474,655 1,273,261
Prepaid Expenses 698,029 408,658 463,957

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Provision for bad debts ---- ----- -----
Cash and Cash equivalents 1,094,892 787,786 17,326,903
Other financial Assets 20,968,017 21,515,496 ------

This ratio shows liquidity position of the firm. In this ratio we deduct inventory because they
cannot be liquidate easily. This ratio may be important for those who do not rely on credit terms
and want to know most liquid position of the firm. In our case the Acid Test ratio of OGDC and
PPL has decreased mainly because inventory level of both the firm has increased and as it is
deducted from current assets, the other liquid assets are decreased. Some of the other assets are
Year also deducted
Company 2008 2007 2006 because they cannot
OGDC 0.97 1.64 2.97 be liquidate easily,
some of them are
PPL 1.62 2.89 2.07
prepaid expenses,
and provision for bad debts.

Cash Ratio :{ (Cash and Cash equivalents+ other financial Assets) ÷ CL}

This ratio has also decreased because the cash and cash equivalents, and other assets has
increased but current liabilities has increased in more proportion which makes the denominator

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high and ultimately the ratio decreases. This ratio shows the firm’s most liquid position and may
be of value to short term debtors.
Here in all above ratio we have seen that they have decreased while the whole effect is caused by
the increase in current liabilities in more proportion than current assets.

Year
Company 2008 2007 2006
OGDC 6.28 7.34 4.42
PPL 3.45 4.25 4.57

Accounts Receivables Turnover: (Net Sales ÷ Avg Gross Receivable)

Days Sales in Receivables: (Avg Gross Receivable ÷ Net Sales÷ 365)

In days

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These two ratios can be explained in one way because both the two ratios are related. These
ratios show how many times a firm collect its account receivables. This ratio may have some
effect on the creditor. This may increase their sales as more creditors will be attracted because
many
Year
creditors
Company 2008 2007 2006
rely on
credit terms. OGDC 2.53 2.32 2.97
Here PPL 10.10 9.38 9.35
accounts
receivables turnover of OGDC has decreased which means they are collecting their accounts
receivables in more days and less frequently. An increase in sales may be because of this.
Similarly PPL’s accounts turnover has also decreased which means they are collecting their
accounts receivables in more days in less frequently. Same may be the case with PPL.

Inventory Turnover: (Cost of Goods Sold ÷ Avg Inventory)

Avg Inventory (in 000s)

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 OGDC PPL
2006 10,252,956 1,273,261
2007 13,083,719 1,474,655
2008 14,848,972 1,604,385

Year
Company 2008 2007 2006
OGDC 145 158 123
PPL 37 39 40
(OGDC)*Inventory=Stores, spares, and loose tools+ Stock in trade
(PPL)*Inventory=Stores and Spares

Cost of Goods Sold (in 000s)

OGDC PPL
2006 30,540,967 11,915,882
2007 30,462,762 13,841,367
2008 37,617, 47 16,210,385

(OGDC)*CGS=Royalty+ Operating expenses Exploration and prospecting expenditure+

Transportation charges
(PPL)*CGS=Field expenditure + Royalties

Days Sales in Inventory: (Avg Inventory ÷ Cost of Goods Sold÷ 365)

In days

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 160
140
120
100
80 OGDC
60 PPL

40
20
0
2008 2007 2006

(OGDC)*Stock in trade is valued at the lower of production cost and net realizable value.

This ratio tells us about how frequently a firm converts its inventory into sales. Here ratio of both
the firm has increased which is good sign and shows that they both are utilizing their resources
efficiently. It may be increased because of increase in sales, although the CGD has also increased
but the increase in sales is greater than the increase in CGS.

LONG TERM DEBT-PAYING ABILITY MEASURES

( EBIT ÷ Interest expense)

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 Year
Company 2008 2007 2006
OGDC 156.75 135.81 6608.97
PPL 457.99 493.81 671.83

OGDC PPL
EBIT Finance cost EBIT Finance cost

2006 65,911,327 9,973 20,219,629 30,096

2007 61,058,726 449,561 24,406,194 49,424
2008 83,360,809 531,799 30,513,179 66,624

This ratio indicates how frequently the firm pays its interest cost or finance cost. This ratio is of
much importance to long term debtors because they are more concerned about their interest
payments and principal payment, so they can decide about having any credit terms with the firm.
Here in our case the ratio has decreased but it doesn’t mean that they are in bad position. It is
because their finance cost has decreased very largely and they haven’t taken any new loan or
debt it can be a good sign as they are not relying on new debt.

Debt Ratio: (Total Liabilities ÷ Total Assets)

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 Year
Company 2008 2007 2006
OGDC 0.27 0.22 0.21
PPL 0.28 0.20 0.26

OGDC PPL
Total Assets Total Liab Total Assets Total Liab

2006 121,314,710 26,544,433 41,066,097 10,877,550

2007 129,338,172 28,721,520 50,369,125 10,271,074
2008 150,568,387 41,196,962 61,023,261 17,368,990

This ratio indicates how much of total funds are financed by debt. The lower this ratio the better
the firm’s position because the less they are financed by debt the less they have to repay. in our
case both firms’ ratio have increased PPL’s ratio decreased in 2007 while in 2008 it again
increased in 2008. Here we also see that PPL’s ratio has increased more than that of OGDC’s but
there is not too much difference which means PPL is relying on debt more than OGDC.

Debt to Equity Ratio: (Total Liabilities ÷ Shareholders’ Equity)

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 Year
Company 2008 2007 2006
OGDC 0.376 0.285 0.28
PPL 0.397 0.256 0.360

0.4
0.35
0.3
0.25
0.2 OGDC

0.15 PPL

0.1
0.05
0
2008 2007 2006

OGDC PPL
Sh.holders Eq Total Liab Sh.holders Eq Total Liab

2006 94,770,277 26,544,433 30,188,547 10,877,550

2007 100,616,652 28,721,520 40,098,051 10,271,074
2008 109,371,425 41,196,962 43,654,271 17,368,990

This ratio also shows the long term debt paying ability of the firm. Here in our case the ratio of
both the firm has increased largely which may be of importance to debtors. The ratio of PPL has
increased more than OGDC which depicts that OGDC is more some what more stable than PPL.
This ratio is one of the most important ratios from analysis point of view because it shows the
true image of the firm.

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PROFITABILITY MEASURES

Net Profit Margin :( Net Income ÷ Net sales)

Year
Company 2008 2007 2006
OGDC 0.395 0.455 0.475
PPL 0.431 0.436 0.421

OGDC PPL
Net Sales Net Income Net Sales Net Income

2006 96,755,382 45,967,723 31,756,712 13,401,001

2007 100,261,191 45,629,964 38,382,645 16,767,774
2008 125,445,674 49,613,593 45,716,789 19,707,398

This ratio indicates the profitability of the firm the higher this ratio the greater the better the
firm’s position will be. In our case NPM of OGDC has decreased from in previous three years,
we have seen that sales of OGDC were increased now NPM has decreased which means that the
operating expenses have increased which ultimately decreased the NPM. On other side PPL’s
NPM has remained stable in these years i.e. they have not changed by too much.

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Total Assets Turnover :( Net sales ÷ Average Total Assets)

Year
Company 2008 2007 2006
OGDC 0.89 0.80 0.82
PPL 0.749 0.76 0.77

OGDC
Net Sales Total Assets Average Total Assets

2005 73,710,101 114,578,933 -----------

2006 96,755,382 121,314,710 117,946,821.5
2007 100,261,191 129,338,172 125,326,441
2008 125,445,674 150,568,387 139,953,279.5

PPL
Net Sales Total Assets

2006 31,756,712 41,066,097

2007 38,382,645 50,369,125
2008 45,716,789 61,023,261

Here we see that Assets turnover of OGDC has increased while the ratio of PPL has decreased
by a fraction. This ratio indicates how efficiently a firm is utilizing its resources. The increase in
OGDC’s assets turnover means they still have the capability to increase their profit despite the
fact that their NPM has decreased.

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Return On Assets :( Net income ÷ Average Total Assets)

Year
Company 2008 2007 2006
OGDC 0.354 0.364 0.389
PPL 0.322 0.332 0.362

OGDC
Net Income Total Assets Average Total Assets

2005 32,967,900 114,578,933 -----------

2006 45,967,723 121,314,710 117,946,821.5
2007 45,629,964 129,338,172 125,326,441
2008 49,613,593 150,568,387 139,953,279.5

PPL
Net Income Total Assets

2006 13,401,001 41,066,097

2007 16,767,774 50,369,125
2008 19,707,398 61,023,261

This ratio shows how much the firm has earned on the assets they have acquired. Similarly it
another reflection of how the firm has utilized their resources. In our case this ratio has decreased
for both the firm because the income has not increased to the amount at which the assets has
increased so the denominator is large which makes the ratio low in this case

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 Du Pont Return On Assets:
(Net Profit Margin*Total Assets Turnover)
{(Net Income ÷ Net sales)* (Net sales ÷ Average Total Assets)}

Year
Company 2008 2007 2006
OGDC 0.395*0.89=0.351 0.455*0.80=0.364 0.475*0.82=0.389
PPL 0.431*0.74=0.318 0.436*0.76=0.331 0.421*0.77=0.324

OGDC PPL
NPM TAT NPM TAT

2006 0.475 0.82 0.421 0.77

2007 0.455 0.80 0.436 0.76
2008 0.395 0.89 0.431 0.749

This is another very important ratio which split the effect on return of assets to two portion i.e.
NPM and Assets turnover. This ratio basically means how the NPM and Assets turnover related
to each other and what effect on ROA is made. Here the Du-Pont ROA of OGDC has decreased

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because the NPM has decreased while assets turnover has not increase by much amount. While
PPL’s ratio has also decreased but not by much figure so not a harmful figure for PP
Return on Total Equity :( Net Income ÷ Average Total Equity)
Year
Company 2008 2007 2006
OGDC 0.472 0.467 0.516
PPL 0.451 0.418 0.443

OGDC
Net Income Total Equity Avg Total Equity

2005 32,967,900 83,209,982 --------------------

2006 45,967,723 94,770,277 88,990,129.5
2007 45,629,964 100,616,652 97,693,464.5
2008 49,613,593 109,371,425 104,994,038.5

PPL
Net Income Total Equity

2006 13,401,001 30,188,547

2007 16,767,774 40,098,051
2008 19,707,398 43,654,271

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This ratio shows how much a firm earns on each rupee invested or they have in owner’s equity.
In this ratio we also include reserves and retained earnings. In above data ratio of both the firms
has increased which is good sign for both the firm. In both firms’ data the net income has
increased while shareholder’s equity didn’t changed by that much margin.

CONCLUSION

OGDC and PPL are major competent in the field of exploration of oil and gas. After calculating
all the ratios and doing all the analysis, we came to the conclusion that OGDC is going far better
then PPL and OGDC is still very big firm than PPL. The reason is quiet clear that OGDC’s
assets and sales are far greater than those of PPL. PPL is having aggressive policies while
OGDC’s policies are stable and not so aggressive. Except some of the ratios OGDC is better in
all ratios and have solid and stable position in the market.

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