Oil and Natural Gas Corp.- Tepid quarter:: Macquarie

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Oil and Natural Gas Corp.
Tepid quarter
Event
 ONGC announced a bottom line of Rs53.8bn, growth of 5.9% YoY. The
operational earnings were in line with expectations, but subsidies were lower
than estimated. Because a mild recovery in overall crude production (driven
by JV output) was the only bright spot in an otherwise unremarkable quarter,
we maintain our Underperform rating on ONGC and trim our TP to Rs1,176
from Rs1,182.
Impact
 JV crude production continues to grow; nominated crude, gas decline:
ONGC’s nominated crude production fell by 1.6% YoY to 6.15MMT, but this
was more than offset by a continuing increase in JV production, which grew
by 84% YoY to 0.7MMT. Nominated gas output declined by 1.1% to 5.8BCM.
 Mild increase in crude prices offset by rupee appreciation: While Brent
prices fell by 1.9% QoQ to US$77.4/bbl, this was totally offset by rupee
depreciation. ONGC’s gross realization of US$79.2/bbl was 3% above Brent.
 Full impact of APM gas price hike, petro-fuel price hike comes through:
This was the first quarter in which the full effects of progressive deregulation
were felt, with the APM gas hike adding an extra Rs17.6bn to revenues and
with auto-fuel price reforms reducing ONGC’s subsidy discount.
 Subsidy of Rs30.2bn; net crude realizations of US$63/bbl up 30% QoQ:
Upstream firms had been directed to pay one-third of gross industry underrecoveries,
which media reports put at ~Rs10bn. ONGC has given discounts
of Rs30.2bn, which implies a share of 84% of total upstream subsidies,
roughly in line with past trends. Crude realizations have therefore been
reduced by US$16.5/bbl to reach US$62.8/bbl.
 Management – ONGC won’t take hit for Cairn India’s share of royalty:
ONGC’s management announced that it had been assured by the GoI that it
would be appropriately reimbursed for the share of royalties that it is paying
on behalf of Cairn India in the Rajasthan block, where ONGC is a 30%
partner.
Earnings and target price revision
 We have trimmed our FY11–13E PAT by 2–5%. We have consequently
revised our target price to Rs1,176 from Rs1,182.
Price catalyst
 12-month price target: Rs1,176.00 based on a DCF methodology.
 Catalyst: Clarity on subsidy sharing; announcement of public offer dates.
Action and recommendation
 Switch to Oil India: Oil India (OINL IN, Rs1,413.2, OP, TP: Rs1,796) has
lower finding costs (US$2.8/bbl vs US$3.8/bbl for ONGC). Further, its growing
crude output (5% CAGR for past three years vs 1% decline for ONGC) and
better reserve-replacement ratio (three-yr average of 179% vs 147% for
ONGC) make it a better investment opportunity, in our view.