IIFL recommendations: Buy ONGC: OVL - steady performance

OVL - steady performance
OVL’s new producing assets—BC-10 and Imperial Energy—helped cushion declines from Sakhalin and
GNOP in FY10. A ramp-up of c2.5x in BC-10’s production since then, along with Imperial Energy and
Block 06.1, Vietnam, will sustain production level over FY11-13ii. The company’s 400kbpd heavy-oil
project, Carabobo, along with gas from Myanmar, will augment production from FY14. Domestic
production will be augmented by marginal fields that ONGC expects will contribute 76mmt of
recoverable oil and 63bcm of recoverable gas. We see strong tailwinds to ONGC’s earnings from
continued reforms (diesel price deregulation) and settlement of the Rajasthan royalty issue leading up
to the FPO. We reiterate BUY with a target price of Rs1,528/share.
Reserves declined YoY, but new assets helped sustain production: OVL reported a 2.2% YoY decline
in reserves, primarily due to BC-10 and Imperial Energy. A ramp-up in production in BC-10 to 34kbpd
(increased further to the current 80kbpd), Block 06.1 Vietnam and Imperial Energy (16kbpd) helped offset
declines at Sakhalin and GNOP. The under development Lan Tay field in Vietnam is scheduled to commence
production in FY13.
Development assets to ramp up production from FY14ii: OVL’s Orinoco heavy-oil acquisition in
Venezuela is expected to contribute 2.2mmtpa production starting FY14. Its gas Blocks A-1 and A-3 in
Myanmar with combined oil in place of 5.35TCF are scheduled to start production from FY14.
Continued reforms provide earnings support; we retain BUY on ONGC: With marginal fields expected
to augment domestic production and OVL’s production sustained by new assets, we see ONGC’s net
realisations improving on continued reforms in the sector. There is a possibility of GoI settling the Rajasthan
royalty issue leading up to the FPO. We retain BUY with a target price of Rs1,528/share.