ONGC - Stable production but dry wells dent profits - IIFL

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Stable production but dry wells dent profits
ONGC’s standalone EPS grew 6% YoY to Rs25.2 in 2QFY11, falling short of our estimate on account of
unexpectedly high dry-well write-offs. We expect write-offs to remain elevated, as ONGC has achieved
only 50% of its ultra-deep-water exploratory programme target for FY11. Domestic production has
stabilised, thanks to Rajasthan ramp-up, with OVL’s production surprising positively by growing 9.6%
YoY over 1HFY11, driven by Block06.1, Vietnam. Average realisation improved to US$62.75/bbl on
lower subsidy burden QoQ. ONGC trades at 10.3x FY12ii EPS of Rs127. With a production ramp-up in
marginal fields allaying concerns of a decline in domestic production, we retain BUY on the stock.
2QFY11 in line with estimates: ONGC’s EPS grew 47% QoQ in 2QFY11, on lower subsidy burden, flat
volumes, and the full impact of the increase in APM gas price. A sharp 41% QoQ increase in recouped costs
driven by c3x jump in dry-well write-offs QoQ dampened EPS growth. The company wrote off five deepwater
exploratory wells in KG-Offshore in 2QFY11, and has achieved only half of its targeted ten-well exploration
programme in ultra-deep water in FY11. Other income grew 102% QoQ on higher dividend income.
OVL production surprises positively: Domestic crude production increased 3.8% QoQ on a 1.6%
increase in standalone production and 27% increase in JV production, driven by Rajasthan. Gas production
declined 2.5% QoQ on the PMT shutdown. OVL’s production grew 9.6% YoY in 1HFY11 on a 35% increase in
Block 06.1 (Vietnam) and a 50% sequential increase in production in BC-10, Brazil.
Domestic production decline arrested, auto-fuel deregulation key: ONGC expects production from
marginal fields to ramp up from 2mmtoe in FY10 to 9.5mmtoe by end-FY12, allaying concerns of a decline in
domestic production. With OVL volumes and earnings likely to surprise on the upside and expected auto-fuel
pricing reforms, we expect ONGC to deliver 18% EPS CAGR over FY10-12ii. We retain BUY on ONGC.





Exploratory drilling update
ONGC has drilled only 58 out of the 150 exploratory wells scheduled for
FY11. These include five out of ten wells scheduled to be drilled in ultradeep-
water and 15 out of 38 shallow-water wells scheduled for this
fiscal. We have built in Rs73bn for dry-well write-offs in FY11ii against
ONGC’s exploratory drilling programme of Rs90bn for the fiscal (some
wells would get carried forward from FY10).
Makes a pitch for settlement of Rajasthan royalty issue
The company paid Rs3.2bn as royalty for Cairn India’s portion of
economic interest in Rajasthan in 2QFY11, up from Rs1.3bn in 1QFY11.
The company said it expects GoI to compensate it for bearing Cairn
India’s share of royalty. At the current production rate in Rajasthan
(120kbpd), ONGC will bear ~US$250mn of royalty on Cairn’s behalf in
FY11


Earnings boost in 2HFY11 from reimbursement from GAIL
ONGC expects to register one-time income of up to Rs15bn over
2HFY11 from reimbursements from GAIL for selling subsidised gas to
the latter in the past under the gas-pooling arrangement.