Executive Summary

For investors with a long-term perspective, we recommend BUY of OGDC because of favorable performance of the company. The company expects its earnings to grow in the future. It is believed that the 0.5% IPO is not going to adversely impact the share price. OGDCL holds over a third of Pakistan's hydrocarbon reserves, and contributed 22 percent and 48 percent of the country's natural gas and oil production in the year to June 2006, respectively. The company has a good position relative to the industry. It is better managed and has a higher profitability than its competitors. The relative efficiency of OGDC can be judged by the fact that its comparative cost per unit BOE is the lowest. The present growth of OGDC has primarily come through the increase in gas consumption. This is because of the perceived low cost of the gas per unit as compared to oil. As the oil reserves of OGDC are limited with an expected life of 8 years, it is predictable that the energy giant will lean towards gas to support its growth, which has a reserve life of 36 years. Explorations in Baluchistan can yield promising results. Geological Surveys (ADB, WB, GSP, etc.) suggest Pakistans potential oil reserves to be around 27 40 bn barrels and 200270 tcf of natural gas reserves. On that basis, less than 3% of oil reserves have been exploited while at full potential we can increase our natural gas reserve life to a whopping 120 years at the present rate of consumption. The market reacted unfavorably on the GDR issue. However, this is a short-term setback. This due to the fact, that the fundamentals of the company are comparatively strong than the industry averages. The recent price decline is unreliable due to low volumes. The most reliable breakouts are accompanied with increased volume. And with prices having only declined 0.38% since the breakout, the validity of the breakout is questionable. Overview of the Energy Sector of Pakistan The energy sector plays a key role in the development and growth of the economy, as the availability of adequate supplies of energy is a pre-requisite to generate economic activities. The main objectives of the energy sector are ensuring adequate, secure, and cost-effective supplies, utilizing the resources efficiently and minimizing its losses. Because of its central importance to economic growth and development, the Government has identified energy as one of the four major drivers of growth (the, other three drivers are agriculture, small and medium enterprises, and information technology). Energy Demand Almost 80% of Pakistans energy is based on oil and gas. The dependance on gas in consumption is

43%. The total consumption in Pakistan is 17.4 million tonnes of oil and 29.9 billion cubic meters (bcm) of gas respectively. Natural Gas consumption has grown at CAGRof 7%4. The demand for natural gas is largelyunmet. The power sector which accounts for40% of the gas consumption, is demanding more gas due to conversion of its oil-basedplants to gas. Domestic Supply Domestic oil accounts for 28% of total demand. However, the remaining demand is satisfied through imported oil. The domestic production has been declining High speed diesel and furnace oil constitutes 80% of the total imports. The suppliers of domestic oil are OGDC, PPL and POL. The estimated reserve life of oil is 13 years. The government and gas distribution companies are spending aggressively to expand their gas distribution networks. It is estimated that the gas reserves of 26.1 TCF will be sufficient for another 20 years. OGDCL holds over a third of Pakistan's hydrocarbon reserves, and contributed 22 percent and 48 percent of the country's natural gas and oil production in the year to June 2006, respectively.

Oil According to the CIA, Pakistan had 341.8 million bbl (2005 est.) of proven conventional oil reserves. Pakistan produced 63,000 barrels per day (bbl/d) of crude oil during 2005. Pakistan has ambitious plans to increase its current output to 100,000 bbl/d by 2010.Consumption of petroleum products during 2005 was estimated at 365 thousand bbl/d. While there is no prospect for Pakistan to reach self sufficiency in oil, the government has encouraged private (including foreign) firms to develop domestic production capacity. Pakistan Petroleum Limited (PPL) expanded its interests this past year by drilling offshore at the Pasni field. It is the first time a Pakistani oil company has explored offshore. In addition, Pakistan has plans to drill additional exploration wells during the remainder 2006. The Oil and Gas Development Company Limited (OGDCL) will lead the drilling in two new blocks of the Sindh and Punjab provinces. Pakistani domestic oil production centres are concentrated in the Potwar Plateau of Punjab and lower Sindh province.

Natural Gas Pakistans largest energy source is natural gas, with demand and imports growing rapidly. Currently, natural gas supplies 49 percent of Pakistans energy needs. According to the CIA, as of January 1, 2005, Pakistan had 759.7 billion cu m of proven natural gas reserves. In 2005, the country produced around 23.8 billion cu m. Consumption of natural gas during 2005 was at 23.8 billion cu m, but consumption levels are expected to grow over the next few years. Pakistan is looking to increase its gas production to support increasing consumption.

Currently, Pakistan ranks third in the world for use of natural gas as a motor fuel, behind Brazil and Argentina. In addition, Pakistan hopes to make gas the fuel of choice for future electric power generation projects.

Sector Organization Pakistani natural gas producers include state-owned companies Pakistan Petroleum Ltd. (PPL) and Oil and Gas Development Corporation (OGDCL), as well as BP, Eni, OMV, and BHP. PPL accounts for one-third of the countrys natural gas production. The company has probable gas reserves of 6.9 Tcf and is capable of producing around 953 million cubic feet per day (Mmcf/d). Sui field, which had its gas supply disrupted by militant attacks this past year, is by far PPL is largest producer at 650 Mmcf/d, followed by the Adhi and Kandhkot (120 Mmcf/d), Mari, and Kandanwari fields. As part of its bold energy sector reform program, the government is committed to privatizing a 51 percent stake of PPL

Exploration and Production Development of new natural gas fields with the help of foreign investors is moving forward in Pakistan. In the past few years, the country discovered seven new gas fields. Pakistans government expects the development of these new fields to add an additional 1 billion cubic feet per day (Bcf/d) to Pakistan's natural gas production. Additional producing fields in Pakistan include Sawan at about 366 Mmcf/d, Bhit at about 316 Mmcf/d, and Zamzama in Sindh province at about 248 Mmcf/d. Zamzama may now be able to produce 380 Mmcf/d, following a new gas discovery in January 2004. In addition, Pakistan gas production stands to increase following a memorandum agreement with Gazprom, Russians state-owned oil and gas giant. The agreement was reached this past October and will include the research and development of future gas fields. Present Situation OGDC Financials For the purposes of obtaining industry average, the aggregate ratios of OGDC, PPL and POL were taken. The company has a good position relative to the industry. It is better managed and has a higher profitability than its competitors. The company possesses excessive unutilized cash that is not being placed to productive use. Also, the company is liquid and can easily meet obligations. Low debt ratios are a trend in the industry. OGDCs has maintained its debt factor closely to this ratio. Company has done away with past practices of high debt composition and now is in line with the industry trends.

Assets turnover was previously lower than the industry average, but now is in line with the industry. Net profit margin has consistently been over the industry average. This indicates that OGDC has been most profitable in the industry given its assets. The return has been higher then others in the industry, owing to the increase in consumption of gas. Investors have favorable expectations of future growth of the company. Investors are willing to pay 6 times the value of stocks of the company. This indicates solid financial strength of the company. Determinant of growth The present growth of OGDC has primarily come through the increase in gas consumption. This is because of the perceived low cost of the gas per unit as compared to oil. As the oil reserves of OGDC are limited with an expected life of 8 years, it is predictable that the energy giant will lean towards gas to support its growth, which has a reserve life of 36 years.

Technical Analysis The share performance has been relatively good. It can be seen from the graph that the volume for 2006 is particularly low, it is believed that investors are expecting a higher price in the future to sell. The relatively moderate RSI of 46 indicates that there is room for prices to increase.

OGDC broke below the downside support level of 119.85, 19 day(s) ago. This is a bearish sign. This previous support level of 119.85 may now provide upside resistance. Volume on the day of the breakout was quite light---48% below average. The most reliable breakouts are accompanied with increased volume. And with prices having only declined 0.38% since the breakout, the validity of the breakout is questionable. The most recently confirmed upside resistance level for OGDC is around 151.30. Expect prices to have some difficulty rising above this level. A break Above this level (particularly on heavy volume) would be a bullish sign.

SWOT ANALYSIS Strengths Infrastructure

Surprisingly enough Pakistan has one of the best developed gas distribution systems among the developing countries. Our neighbor India for comparison does not have a single city which has gas distribution through pipelines. As shown in the maps below almost all the major cities in the Sindh and Punjab Region are connected through pipelines. What the maps also show is that apart from two or three cities, the whole of Pakistans Wild West in NWFP and Baluchistan is not covered. Since most exploration is now taking place in the harder to drill but highly untapped areas of Zone 1 (Major Portion of NWFP and Baluchistan), the ability of discovered reserves to come online is a cause of concern for exploration companies since they can only attain revenue once they have sold their output.

Ongoing Development in Present Fields OGDC is at present engaged in seven major developmental projects at Dhakni, Chanda, Dhodak, Uch, Qadirpur, Tando Allahyar and Sinjhoro. Recommendations For investors with a long-term perspective, we recommend BUY of OGDC because of favourable performance of the company. The current declines in prices are unreliable because of low volumes accompanying the prices. However, the future of the company is bright, mainly due the inherent strength of the company.