India Exploration & Production- Initiate on OIL with UW; prefer ONGC:: JPMorgan

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India Exploration & Production
The song remains the same: Initiate on OIL with UW;
prefer ONGC



• Prefer ONGC to OIL: We initiate coverage on OIL with an
Underweight rating; we prefer Neutral-rated ONGC as a play on the
SOE upstream sector on valuations. While both companies have similar
regulatory risks, ONGC’s earnings have lower sensitivity to subsidy
changes and its larger cash flow will help it sustain high investments
needed for a growing global E&P presence, in our view.
• The song remains the same – aging fields, large cash balances: Apart
from the subsidies, both upstream SOE companies face similar issues –
1) aging assets which require incrementally higher investments to extract
oil reserves, and 2) large cash balances and incremental cash flow which
would need to get deployed in a competitive race for global oil reserves.
We see return ratios for both companies declining in the medium term.
• India is a good exploration base for upstream players…India’s
sedimentary basins provide significant unexplored acreage for upstream
companies (34% un/under explored). ONGC, OIL, RIL and Cairn have
extensive exploration programs which could provide upside for these
companies.
• …but inorganic growth overseas could be expensive: Forays into
overseas ventures (Carabobo, Venezuela, Imperial Energy) could be
expensive and are likely to pull down return ratios.

• Valuations – close to regional peers, with policy risk: We believe
Indian upstream SOEs should trade at a discount to regional peers given
the ad-hoc subsidy-sharing regime. Our PTs are based on 4x
EV/EBITDA, at a 10% discount to the regional peer group. Key upside
risks to our cautious view are a progressive government policy stance on
subsidies, while a downside risk is if crude trades below US$70/bbl.