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Higher other income and lower recouped costs led to higher PAT
ONGC’s Q3FY11 revenues and EBITDA were in line with estimates at INR 185.9 bn
(+21.4% Y-o-Y, +2.2% Q-o-Q) and INR 113.1 bn (+ 23.7% Y-o-Y, +2.1% Q-o-
Q), respectively. However, PAT, at INR 70.8 bn (+31.4% Q-o-Q, +132% Y-o-Y),
was much higher than the estimated INR 45.3 bn due to lower recouped costs and
higher other income. Recouped costs, at INR 36.4 bn, was lower 17.3% Q-o-Q and
22.1% Y-o-Y due to lower write-off on account of dry wells (INR 13.6 bn against
INR 24.4 bn in Q2FY11, INR 24.8 bn in Q3FY10). Other income, of INR 28.9 bn
(INR 11.4 bn in Q2FY11), included INR 19 bn received from Gas Pool Account.
Crude and gas production grew due to re-start of Panna-Mukta fields
Overall crude production, at 7.03 mmt (nominated = 6.21 mmt, JV crude = 0.82
mmt), grew 2.6% Q-o-Q and 5.9% Y-o-Y due to resumption of prodcution from
Panna-Mukta JV fields. Similarly, overall natural gas production, at 6.36 bcm,
improved 1.8% Q-o-Q, but was lower 1.7% Y-o-Y due to partial impact of startup
of Panna-Mukta fields.
Net realisation, at USD 64.8/bbl, is highest since Q1FY09
ONGC’s gross crude realisation increased 12.5% Q-o-Q and 16.3% Y-o-Y, to USD
89.1/bbl, due to rise in crude prices. Subsidy to OMCs, at INR 42.2 bn or USD
24.3/bbl (+48% Q-o-Q), led to net realisation at USD 64.8/bbl, the highest since
Q1FY09. Overall cash costs for Q3FY11 stood at USD 9.8/boe, up 14.1% Y-o-Y
and 8.7% Q-o-Q.
Outlook and valuations: Attractive; upgrade to ‘BUY/SP’
We had earlier downgraded ONGC to ‘HOLD’ as we believed that crude prices
would remain strong and diesel de-regulation was difficult. However, with clarity
that diesel price controls will stay, ONGC has corrected 14.2% in the past three
months. While we continue to model upstream share at one-third of total underrecovery
and FY12E crude average at USD 90/bbl, ONGC’s nominated crude is
expected to fetch net realisation at USD ~61/bbl (FY11E @ USD ~59/bbl), leading
to FY12E EPS at INR 129/share, an increase of 16% over FY11. Our March 2012
SOTP for ONGC, at INR 1,379/share (earlier INR 1,424/share), offers 22% upsides
on CMP. Recent correction in the stock price has moved ONGC to attractive
valuations. At CMP of INR 1,133, ONGC is trading at 8.8x FY12E EPS, which
compares favourably with the past five-year range of 9-11x. Hence, we upgrade
the stock to ‘BUY/Sector Performer’ from ‘HOLD/Sector Underperformer’.
Other highlights
• The company has notified five discoveries to the DGH since the last board meeting:
two in western offshore basin and one each in Mahanadi offshore basin, western
onshore basin and Cauvery onland basin.
• VAP sales in Q3FY11, at 790 TMT, jumped 8.5% Q-o-Q, but were lower 3.4% Y-o-Y
due to problem in cooling tower in ONGC’s Uran facility.
• Statutory levies, at USD 11.05/boe was high due to increased royalties for Rajasthan
crude. ONGC paid INR 5.46 bn for Rajasthan crude.
• Gas Pool account still has INR 4 bn remaining as contingency for any future claims.
• Income from site restoration fund increased to INR 2.6 bn against INR 1.1 bn in
Q2FY11, as the company has increased the interest assumption to 8.5% during
Q3FY11 against 5% until Q2FY11.
• Impact of subsidy on PAT was INR 24 bn for Q3FY11.
• ONGC shareholders have approved split of shares into face value of INR 5/share, i.e
two shares into one share currently held, and bonus issue of shares in the ratio of 1:1.
The record date for the same has been fixed at February 09, 2011.
Revising down FY12E EPS to incorporate higher recouped costs; SOTP down
3.2% to INR 1,379/share
We believe that ONGC’s recouped costs will move in a higher band in future. Hence, after
incorporating higher recouped costs, our FY12E EPS have been revised lower by 4.2% to
INR 129/share. Further, we are reducing the FY11E estimates to incorporate higher
under-recoveries for OMCs to INR 105/share. In line with lower earnings, we have also
revised ONGC’s SOTP to INR 1,379/share.
Company Description
ONGC dominates India’s oil & gas production with more than two-third share of the
country’s production of oil and oil equivalent gas. It contributes ~78% and ~73% to total
oil and gas production, respectively, in India. ONGC has 962.9 MTOE barrels of proved
(1P) reserves, as on FY10 end. ONGC’s total domestic hydrocarbon production for FY10
aggregated 52.1MMT.
Investment Theme
Significant APM gas price hike at one go is definitely positive. This is a significant
positive for the company and will support the substantial capital investments by it.
Further, ONGC’s current exploration acreage offers significant opportunities for increase
in reserves. Further, we are enthused by ONGC’s asset, new projects, and potential
exploration upsides. However, till clear subsidy sharing mechanism emerges,
uncertainty may prevail.
Key Risks
Lower-than-expected crude prices will impact the company’s crude realizations and
earnings. Additionally, the company’s net realizations also depend on the upstream
(ONGC) subsidy sharing.
Higher–than-expected decline rates in its existing matured assets could impact its
production, going forward.
ONGC has assets in countries like Sudan and Syria, which face geo-political risks.
Therefore, any unfavourable incident could impact production.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Higher other income and lower recouped costs led to higher PAT
ONGC’s Q3FY11 revenues and EBITDA were in line with estimates at INR 185.9 bn
(+21.4% Y-o-Y, +2.2% Q-o-Q) and INR 113.1 bn (+ 23.7% Y-o-Y, +2.1% Q-o-
Q), respectively. However, PAT, at INR 70.8 bn (+31.4% Q-o-Q, +132% Y-o-Y),
was much higher than the estimated INR 45.3 bn due to lower recouped costs and
higher other income. Recouped costs, at INR 36.4 bn, was lower 17.3% Q-o-Q and
22.1% Y-o-Y due to lower write-off on account of dry wells (INR 13.6 bn against
INR 24.4 bn in Q2FY11, INR 24.8 bn in Q3FY10). Other income, of INR 28.9 bn
(INR 11.4 bn in Q2FY11), included INR 19 bn received from Gas Pool Account.
Crude and gas production grew due to re-start of Panna-Mukta fields
Overall crude production, at 7.03 mmt (nominated = 6.21 mmt, JV crude = 0.82
mmt), grew 2.6% Q-o-Q and 5.9% Y-o-Y due to resumption of prodcution from
Panna-Mukta JV fields. Similarly, overall natural gas production, at 6.36 bcm,
improved 1.8% Q-o-Q, but was lower 1.7% Y-o-Y due to partial impact of startup
of Panna-Mukta fields.
Net realisation, at USD 64.8/bbl, is highest since Q1FY09
ONGC’s gross crude realisation increased 12.5% Q-o-Q and 16.3% Y-o-Y, to USD
89.1/bbl, due to rise in crude prices. Subsidy to OMCs, at INR 42.2 bn or USD
24.3/bbl (+48% Q-o-Q), led to net realisation at USD 64.8/bbl, the highest since
Q1FY09. Overall cash costs for Q3FY11 stood at USD 9.8/boe, up 14.1% Y-o-Y
and 8.7% Q-o-Q.
We had earlier downgraded ONGC to ‘HOLD’ as we believed that crude prices
would remain strong and diesel de-regulation was difficult. However, with clarity
that diesel price controls will stay, ONGC has corrected 14.2% in the past three
months. While we continue to model upstream share at one-third of total underrecovery
and FY12E crude average at USD 90/bbl, ONGC’s nominated crude is
expected to fetch net realisation at USD ~61/bbl (FY11E @ USD ~59/bbl), leading
to FY12E EPS at INR 129/share, an increase of 16% over FY11. Our March 2012
SOTP for ONGC, at INR 1,379/share (earlier INR 1,424/share), offers 22% upsides
on CMP. Recent correction in the stock price has moved ONGC to attractive
valuations. At CMP of INR 1,133, ONGC is trading at 8.8x FY12E EPS, which
compares favourably with the past five-year range of 9-11x. Hence, we upgrade
the stock to ‘BUY/Sector Performer’ from ‘HOLD/Sector Underperformer’.
Other highlights
• The company has notified five discoveries to the DGH since the last board meeting:
two in western offshore basin and one each in Mahanadi offshore basin, western
onshore basin and Cauvery onland basin.
• VAP sales in Q3FY11, at 790 TMT, jumped 8.5% Q-o-Q, but were lower 3.4% Y-o-Y
due to problem in cooling tower in ONGC’s Uran facility.
• Statutory levies, at USD 11.05/boe was high due to increased royalties for Rajasthan
crude. ONGC paid INR 5.46 bn for Rajasthan crude.
• Gas Pool account still has INR 4 bn remaining as contingency for any future claims.
• Income from site restoration fund increased to INR 2.6 bn against INR 1.1 bn in
Q2FY11, as the company has increased the interest assumption to 8.5% during
Q3FY11 against 5% until Q2FY11.
• Impact of subsidy on PAT was INR 24 bn for Q3FY11.
• ONGC shareholders have approved split of shares into face value of INR 5/share, i.e
two shares into one share currently held, and bonus issue of shares in the ratio of 1:1.
The record date for the same has been fixed at February 09, 2011.
Revising down FY12E EPS to incorporate higher recouped costs; SOTP down
3.2% to INR 1,379/share
We believe that ONGC’s recouped costs will move in a higher band in future. Hence, after
incorporating higher recouped costs, our FY12E EPS have been revised lower by 4.2% to
INR 129/share. Further, we are reducing the FY11E estimates to incorporate higher
under-recoveries for OMCs to INR 105/share. In line with lower earnings, we have also
revised ONGC’s SOTP to INR 1,379/share.
Company Description
ONGC dominates India’s oil & gas production with more than two-third share of the
country’s production of oil and oil equivalent gas. It contributes ~78% and ~73% to total
oil and gas production, respectively, in India. ONGC has 962.9 MTOE barrels of proved
(1P) reserves, as on FY10 end. ONGC’s total domestic hydrocarbon production for FY10
aggregated 52.1MMT.
Investment Theme
Significant APM gas price hike at one go is definitely positive. This is a significant
positive for the company and will support the substantial capital investments by it.
Further, ONGC’s current exploration acreage offers significant opportunities for increase
in reserves. Further, we are enthused by ONGC’s asset, new projects, and potential
exploration upsides. However, till clear subsidy sharing mechanism emerges,
uncertainty may prevail.
Key Risks
Lower-than-expected crude prices will impact the company’s crude realizations and
earnings. Additionally, the company’s net realizations also depend on the upstream
(ONGC) subsidy sharing.
Higher–than-expected decline rates in its existing matured assets could impact its
production, going forward.
ONGC has assets in countries like Sudan and Syria, which face geo-political risks.
Therefore, any unfavourable incident could impact production.
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