OGDCL Eyes Improved Cash Flow after Repayment of Rs 82b

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Staff Report.
In a notice to the exchange, Oil & Gas Development Company (OGDC) announced that the government has approved the payment of Rs82 billion, representing the principal amount of the company’s investment in privately placed Term Finance Certificates (TFCs) issued by Power Holding (Private) Limited (PHL).

Additionally, the government has approved the repayment of Rs92 billion in interest in twelve equal installments, starting from July 2025. However, as part of the settlement, OGDC has agreed to waive off Rs72 billion on account of liquidated damages (LDs) as per the government’s directives.

To recall, the government approved the issuance of TFCs worth Rs82 billion by PHL in 2013 to partially reduce the circular debt in the energy sector. Initially, these were supposed to mature in seven years, but in 2020, the Board of Directors approved the extension of the tenure of TFCs from seven to ten years, till June 2023.

This clearance of TFCs is expected to further improve the cash flow position of the company. We believe these funds will either be used for announcing dividends, diverted for exploration activities, or to clear other pending payables.

As per news reports, the government is also planning an offshore bid round in the third quarter of 2024, where twelve blocks will be offered in competitive bidding. These blocks comprise shallow water, deep water, and ultra-deep water blocks, which in our view will require higher capital expenditure commitments.OGDCL Celebrates Victory in President’s Trophy

Furthermore, on the payables side, OGDC has to pay Rs30.5 billion (Rs7 per share) to the government for pending royalty payments. The above cash flows may also be diverted to settle these royalty payments.

Since the markup payment is delayed and will start from July 2025 instead of July 2024, OGDC has to book an estimated loss of Rs24 billion in FY24 under IFRS 9, although it is a non-cash expense, according to news reports.

We maintain a BUY stance on OGDC, which remains one of our top picks due to improving cash flows in the gas sector following two significant increases in gas prices. We highlighted this in our mid-year strategy release on May 11, 2024, titled “Index to reach 87k by Dec 2024, 106k by Jun 2025 – PE to revert to its mean in 3 years.” The stock is currently trading at a cheaper FY25F P/E of 2.6x,” Topline said.