ONGC-Satisfactory operational performance by OVL in 1HFY11: Kotak Sec

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Oil & Natural Gas Corporation (ONGC)
Energy
Satisfactory operational performance by OVL in 1HFY11. We see OVL’s 1HFY11
operational performance in line with expectations. OVL produced 4.56 mtoe (3.26 mn
tons of oil and 1.3 bcm of gas) in 1HFY11. However, OVL’s 1HFY11 net income at `7.5
bn (adjusted `14.9 bn) was impacted by extraordinary items. Our FY2011E estimate is
`31.2 bn without the extraordinary provisions made by OVL. We retain FY2011E
consolidated earnings estimates.

Healthy production volumes; ramp-up in 2HFY11 will help achieve our FY2011E estimates
Exhibit 1 gives the OVL’s oil and gas production volumes for 1HFY11 and compares the same with
our FY2011E estimates. OVL produced 4.56 mtoe (3.26 mn tons of oil and 1.3 bcm of gas) in
1HFY11. We estimate OVL’s production volumes at 7.16 mn tons of oil and 2.87 bcm of gas. We
expect OVL to achieve our FY2011E production estimates given ramp-up in production from (1)
Block BC-10 in Brazil, (2) Sakhalin block and (3) erstwhile Imperial assets.

1HFY11 net income impacted by one-offs/extraordinary items
OVL reported 1HFY11 net income at `7.5 bn versus `10.4 bn in 1HFY10. However, we note that
net income was impacted by extraordinary write-offs and provisions—(1) `5.4 on account of
provision towards a possible settlement of a dispute under arbitration in respect of transfer of
ownership interest in a crude pipeline in Sudan and (2) one-time tax provision of `2 bn towards
corporate income tax on account of exchange gain arising from devaluation of local currency by
the Venezuelan government. The adjusted net income for OVL for 1HFY11 was `14.9 bn.

Qoq decline in adjusted net income on account of shutdowns at various fields
OVL reported 2QFY11 net income at `6.45 bn versus `8.46 bn in 1QFY11. The qoq decline in
income reflects lower oil and gas production due to shutdown taken at various fields—(1) Sakhalin
field, (2) Vietnam gas fields and (3) Brazil’s BC-10 block. Oil production was at 1.58 mn tons versus
1.68 mn tons in 1QFY11 and gas production was at 615 mcm versus 686 mcm in 1QFY11.
However, the management highlighted that the shutdowns have been completed and production
in 2HFY11E will be higher versus production in 1HFY11.

Retain estimates
We maintain our volumes and earnings estimates for OVL currently. We estimate OVL to report
net income at `31.2 bn (adjusted basis) and production at 7.157 mn tons of oil and 2.87 bcm of
gas. We expect a ramp-up in production from several fields, which will bolster the earnings in
2HFY11E. We discuss the same in detail below.


Ramp-up in production from key assets
􀁠 Sakhalin block. We highlight that the Odoptu Field in Sakhalin project started
production from September 15, 2010. The field is currently producing in the range of
45,000-50,000 b/d, which is above the targeted production of 38,000 b/d. This should
help in arresting the natural decline for Chavyo, the first field brought under development.
OVL holds 20% participating interest in the block.
􀁠 Imperial assets. We note that Imperial assets are currently producing at 17,000 b/d.
However, the production is expected to ramp up to 20,000 b/d by December 2010 and
25,000 b/d by end-FY2011.
􀁠 Block BC-10. The production from this block was impacted by shutdowns taken in
2QFY11. However, the production from this block has already reached a production level
of 80,000 b/d. OVL holds 15% participating interest in the block.