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ONGC 2QFY11: EBITDA, PAT in-line; Higher D,D&A offset by higher other income; upstream sharing at 1/3rdlevel; Awaiting clarity on policy reforms
- ONGC (ONGC IN, Mkt Cap US$61.8b, CMP Rs1,308, Buy) reported standalone EBITDA at Rs111b (up 28%YoY and 38% QoQ). Despite higher D,D&A, PAT was in-line at Rs53.9b (up 6%YoY and 47% QoQ) due to higher than expected other income at Rs11.4b (vs est of Rs8.7b).
- D,D&A surprises negatively: As against our earlier expectation that there would be no more surprises in the D,D&A, ONGC once again surprised negatively. 2QFY11 D,D&A charges stood at Rs44b (v/s est. of Rs36b) up 87%YoY and 41%QoQ led by dry well expenses of Rs24.4b. This dry well write-off was primarily related to its drilling of ultra-deepwater wells in KG basin.
- Production and Sales up QoQ: Oil & gas sales showed uptick on QoQ and YoY basis at 11.0mmtoe. (+2% YoY and +4.7% QoQ), while production showed uptick on QoQ basis at 13.1mmtoe. (-0.2% YoY and +0.7% QoQ). We believe the QoQ increase in the sales was primarily due to build-up of oil inventory in the prior quarter.
- Net realization at US$62.7/bbl: 2QFY11 subsidy payout stood at Rs30b (est of Rs27.9b) as against Rs26.3b in 2QFY10 and Rs55.2b in 1QFY11. In 2QFY11, gross realization stood at US$79.2/bbl, discount was US$16.5/bbl and net realization stood at US$62.7/bbl (v/s est of US$62.3/bbl) as against US$56/bbl in 1QFY10 and US$48/bbl in 1QFY11.
- Expects one-time credit of Rs15b in coming quarters: ONGC CMD indicated that the company is likely to get one-time credit of Rs15b in coming quarters from gas pool account. Our current estimates do not factor in this gas pool account credit (likely EPS increase of Rs5/sh).
- Key events to watch: Though de-regulation of petrol and hike in diesel price has reduced the overall subsidy in the system significantly, key event to watch would be rationalization of the subsidy sharing by the government.
- We currently model Brent oil price of US$75.7/bbl in FY11 and US$75/bbl over the long term. We model upstream sharing at 1/3rd level of gross under recoveries in our estimates for FY11 and FY12. Stock trades at 14.6x FY11 EPS estimate of Rs129. Our SOTP-based target price for ONGC is Rs1,380, Maintain Buy.
- We would make changes to our estimates post clarity on further write-offs and timing of gas pool credit after the Earnings Concall tomorrow.
Subsidy burden stood at Rs30.2b (upstream shared 1/3rd of gross under recoveries)
- Subsidy burden stood at Rs30.2b (v/s est of Rs27.8b), up 15%YoY and down 45% QoQ. ONGC shared 80% of the total upstream sharing in 2QFY11 (80% in FY10).
- In FY10, upstream sharing was based on 100% of auto fuel under recoveries. However, for FY11, government has indicated that upstream will share 1/3rd of total under recoveries.
- We currently model upstream sharing at 1/3rd levels of total under recoveries in FY11 and FY12 and ONGC to share 80% of the same.
2QFY11 operational highlights
- Oil production (incl. JV) stood at 6.9mmt (+3.3% YoY); while sales were at 5.9mmt (+6.5% YoY).
- Gas production (incl. JV) stood at 6.3bcm (-3.7% YoY); while sales were at 5bcm (-3.0% YoY).
Update on OVL Production
- OVL’s oil production in 1HFY11 stood at 3.25mmt (annualized 6.5mmt v/s actual 6.5mmt in FY10). The major uptick in 1HFY11 production is from Imperial Energy blocks.
- OVL’s gas production in 1HFY11 stood at 1.31BCM (annualized 2.6bcm v/s actual 2.4bcm in FY10).
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