ONGC Higher dry wells led to lower than expected PAT :: Edelweiss

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ONGC
Higher dry wells led to lower than expected PAT


􀂄 PAT, at INR 53.9 bn, jumped 47.2% Q-o-Q and 5.9% Y-o-Y
ONGC’s Q2FY11 revenues and EBITDA were higher than estimates. Revenues rose
20.6% Y-o-Y and 33.1% Q-o-Q due to higher revenues from crude and natural gas
(full impact of increase in natural gas prices). Operating expenses, at USD
9.0/boe, were lower than estimated USD 11.0/boe, leading to higher EBITDAX
than estimated. Recouped costs, at INR 44 bn (+41.3% Q-o-Q, +86.8% Y-o-Y),
were higher against our expectation of INR 27.6 bn due to higher write-offs on
account of dry wells (INR 24.4 bn against INR 8.8 bn in Q1FY11 and INR 6.6 bn in
Q2FY10). Consequently, core profit of INR 53.9 bn, up 5.9% Y-o-Y and 47.2%
Q-o-Q, was lower than our expectation (INR 57.37 bn).
􀂄 Crude production increases due to higher Rajasthan crude
Crude revenues rose due to higher crude sales volume vis-à-vis production (ONGC
had carried large inventories in Q1FY11) and lower subsidies. ONGC’s nominated
crude production fell 1.6% Y-o-Y, but increased 1.7% Q-o-Q. Overall crude
production (including JV crude), at 6.85 mmt, was higher 3.3% Y-o-Y and 3.8%
Q-o-Q due to higher crude production from Mangala fields in Rajasthan operated
by Cairn India. Overall natural gas production, at 6.25 bcm, was down 3.1%
Y-o-Y and 2.5% Q-o-Q due to shutdown of Panna-Mukta fields (pipeline leaks).
􀂄 Net realisation, at USD 62.8/bbl, up 30.6% Q-o-Q and 11.2% Y-o-Y
ONGC’s gross nominated crude realisation increased 12.4% Y-o-Y to USD
79.21/bbl, but dipped 2.0% Q-o-Q due to dip in crude prices. The company bore
INR 30.2 bn subsidy for Q2FY11 against our estimate of INR 31.2 bn, implying
discounts of USD 16.5/bbl (up 17% Y-o-Y). Hence, net realisation increased
30.6% Q-o-Q and 11.2% Y-o-Y to USD 62.8/bbl.

􀂄 Outlook and valuations: Q3FY11 may be better; maintain ‘HOLD’
ONGC’s Q2FY11 PAT was lower than estimate due to higher dry wells partially
offset by lower subsidies. The quarter results factor in full impact of increase in
petroleum product/natural gas prices. We have incorporated annual report data
and have changed our FY11E and FY12E EPS by -8.2% (higher recouped costs)
and -3.9% (higher revenues and lower operating costs partially offset by higher
recouped costs), respectively. We are rolling over our fair SOTP value to Mar-12
and estimate the same at INR 1,457/share, which leaves 11% upsides from the
current level. Hence, we maintain ‘HOLD/Sector Underperformer’ on the stock.
At INR 1,304, ONGC trades at FY12E P/E of 9.8x and FY12E EV/EBITDAX of 4.6x.