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Oil & Gas Development Company will likely get the payment of a long-standing TFC worth PKR82bn

The government has approved the payment of a long-standing TFC held by Oil and Gas Development Company Limited (OGDC), worth PKR82bn (principal only; PKR19.1/share). The TFC (a corporate bond) was issued by a state-owned company, Power Holdings (PHPL), in 2013 as a partial resolution of outstanding circular debt with OGDC. About PKR82bn of OGDC’s receivables at the time (from oil and gas distribution companies and refineries) were struck off, and in return, OGDC was given the TFC (backed by the gov’t), which was supposed to mature in seven years (2020).

However, no payments—neither principal nor interest—have been made to OGDC since. In 2020, the government unilaterally extended the tenure of the TFC to 10 years until July 2023. The accrued interest of PKR88bn is not included in this scheme and might be settled separately.

Possible scenarios: What would OGDC do with the money?

§  As highlighted in our note on the E&P sector, the clearance of the TFC’s principal amount would potentially lead to a one-time bumper dividend of c.PKR20/share. This would return most of the settled amount back to the gov’t of Pakistan, which owns 85% of OGDC.

§  The company has to pay PKR30.5bn to the gov’t on account of pending royalty payments. The above transaction might entail a settlement of overdue royalty payments to the gov’t, thereby reducing the distributable cash to c.PKR13.0/sh.

§  Nonetheless, the measure will be a much-needed first step in cleaning the company’s balance sheet, which has been severely hampered by circular debt (total receivables of PKR627bn, 40% of total assets, as of March 2024). A cleaner balance sheet would pave the way for a 10-15% stake sale to a GCC sovereign, in our view. With a 15% stake sale at a stock price of PKR150/sh, for example, the gov’t would fetch up to c.US$350mn.

§  The transaction modalities are yet to be finalized. However, we understand the settlement will be made before the close of this fiscal year (next two days), which could mean some surprise payout in 4QFY24 results.

We prefer OGDC in the sector due to its relatively superior production profile compared to its peers and its attractive valuation, trading at low P/E and EV/EBITDA multiples of 3.3x and 0.7x times, respectively. Such measures as above, aimed at cleaning the company’s balance sheet, could significantly unlock value for the stock. Additionally, recent reforms in the gas sector are expected to benefit the company by halting further debt accumulation. We reiterate our Buy stance on OGDC with a target price of PKR170/share.

Courtesy – Intermarket Securities Limited.

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