IIFL: buy ONGC: Focused exploration approach

ONGC will keep its exploration efforts focussed on nomination blocks
in FY11-12, as its identified prospective acreages approach the end of
their exploration phase. The company is scheduled to drill
exploratory wells in seven deepwater NELP blocks in FY12, and five
of these are in prospective east coast basins. A continued focus on
attractive acreages in nomination blocks and a pick-up in exploration
activity in NELP acreages should support ONGC’s reserve accretion.
We expect continued reforms on auto fuel deregulation over 2HFY11
to aid ONGC's earnings growth in FY12. We retain BUY with a target
price of Rs1,528/share.
ONGC to focus on identified attractive nomination acreage in next
two years: ONGC has 63 nomination exploration blocks (PEL), of which
48 PELs are either in their final year of exploration, or have exceeded the
exploration period. Among these, the company has identified 12 highprospect
PELs based on exploratory work carried out till now. These PELs
are estimated to have an in-place volume of 274mtoe, which is likely to
increase to a minimum of 438mtoe in the next two years. We believe
ONGC will maintain its exploration focus on the identified high-prospect
PELs in FY11-12, as blocks near the end of their exploration phase; this
should help ONGC maintain its reserve accretion rate.
NELP acreage drilling to pick up pace in FY12: ONGC is scheduled to
drill exploratory wells in seven deepwater NELP blocks by end-FY12. Five
of these blocks are in the prolific KG and Mahanadi basins. The company
is also scheduled to drill one appraisal well each in the discovered KG
basin (KG-DWN-98/2) and Mahanadi basin (MN-DWN-98/3) block. As
nomination blocks are nearing exploration phase expiry, we believe the
company’s exploration activity in NELP acreages will pick up from FY12,
giving a boost to its reserve accretion.
Continued reforms provide earnings support; we retain BUY: We
believe that focused exploration activity in nomination blocks in FY11-12
and a pick-up in exploration activity in NELP acreages from FY12 will
support ONGC’s reserve accretion rate. With marginal fields expected to
augment domestic production, we see ONGC’s net realisations improving
on continued reforms in the sector. We retain BUY with a target price of
Rs1,528/share.