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ONGC ----------------------------------------------------------------------------------- Maintain NEUTRAL
Highest ever quarterly profit
● ONGC reported 3QFY11 EPS of Rs.33.1, 28% above estimates,
principally on lower DD&A charges and higher other income. For
3Q, ONGC was expected to receive money from GAIL for the gas
pool settlement. At Rs19 bn, this was Rs4 bn above estimates.
● DD&A charges for ONGC have been volatile, typically surprising
on the upside on higher dry well write-offs. The 3Q write offs have
almost halved QoQ, and contributed materially to the EPS beat.
● Encouragingly, ONGC’s domestic oil output grew 1% QoQ, while
gas output was flat. Restart of Panna Mukta fields has helped JV
oil numbers. Due to lag in domestic LPG pricing, 4Q subsidy
payouts will rise even if crude remains flat. Its net realisations rose
on higher crude, though impact may be overstated.
● The ONGC stock has been weak on subsidy concerns (on high
crude) and before the large government share sale. Yet
valuations, at less than 10x P/E and appear attractive at about 4x
EV/EBITDA.
ONGC 3QFY11 earnings beat materially
ONGC delivered its highest ever quarterly profit of Rs.70.8 bn, up
31% QoQ and 28% higher than our estimates. Revenues and EBITDA
were in line with expectations – the large beat was principally driven
by lower DD&A charges (dry well writeoffs fell 44% QoQ) and higher
other income. ONGC was expected to receive a one-time settlement
from GAIL from the gas pool account – the actual amount though, was
Rs.4bn higher than our estimates. Total tax rates increased 174 bp
QoQ, and are now closer to the marginal rate. Total royalty payments
for the quarter remained flat QoQ despite a small increase in ONGC’s
royalty payments for the Mangala fields. Despite the higher crude
prices, ONGC’s rupee crude realisations fell marginally QoQ, lowering
royalty payments on domestic oil / gas production.
Subsidy payments slow to catch up
ONGC’s gross crude realisations increased US$9.9/bbl QoQ. Post
subsidy realisations increased US$2/bbl QoQ. On headline, this would
imply ONGC has relatively healthy positive leverage to crude prices,
despite subsidy payments. However, we note 3Q numbers may have
exaggerated the impact. Prices of LPG in India, for example, are set
monthly at the beginning of every month. Calculated under recoveries
for downstream companies (and therefore ONGC’s share of subsidy
payments) would therefore lag increasing crude prices. Even if crude
and USD/INR stay at 3Q averages, ONGC subsidy payments would
increase in 4Q – net realisation would fall.
Worried on subsidy?
ONGC stock has been weak recently on concerns that subsidy
payments might breach the historical 33% share at high crude prices.
With impending share sale, this would seem unlikely in the near term.
ONGC currently trades at less than 10x earnings at about 4x EBITDA.
Its discount to global E&P peers has expanded to close to 40% now.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
ONGC ----------------------------------------------------------------------------------- Maintain NEUTRAL
Highest ever quarterly profit
● ONGC reported 3QFY11 EPS of Rs.33.1, 28% above estimates,
principally on lower DD&A charges and higher other income. For
3Q, ONGC was expected to receive money from GAIL for the gas
pool settlement. At Rs19 bn, this was Rs4 bn above estimates.
● DD&A charges for ONGC have been volatile, typically surprising
on the upside on higher dry well write-offs. The 3Q write offs have
almost halved QoQ, and contributed materially to the EPS beat.
● Encouragingly, ONGC’s domestic oil output grew 1% QoQ, while
gas output was flat. Restart of Panna Mukta fields has helped JV
oil numbers. Due to lag in domestic LPG pricing, 4Q subsidy
payouts will rise even if crude remains flat. Its net realisations rose
on higher crude, though impact may be overstated.
● The ONGC stock has been weak on subsidy concerns (on high
crude) and before the large government share sale. Yet
valuations, at less than 10x P/E and appear attractive at about 4x
EV/EBITDA.
ONGC 3QFY11 earnings beat materially
ONGC delivered its highest ever quarterly profit of Rs.70.8 bn, up
31% QoQ and 28% higher than our estimates. Revenues and EBITDA
were in line with expectations – the large beat was principally driven
by lower DD&A charges (dry well writeoffs fell 44% QoQ) and higher
other income. ONGC was expected to receive a one-time settlement
from GAIL from the gas pool account – the actual amount though, was
Rs.4bn higher than our estimates. Total tax rates increased 174 bp
QoQ, and are now closer to the marginal rate. Total royalty payments
for the quarter remained flat QoQ despite a small increase in ONGC’s
royalty payments for the Mangala fields. Despite the higher crude
prices, ONGC’s rupee crude realisations fell marginally QoQ, lowering
royalty payments on domestic oil / gas production.
Subsidy payments slow to catch up
ONGC’s gross crude realisations increased US$9.9/bbl QoQ. Post
subsidy realisations increased US$2/bbl QoQ. On headline, this would
imply ONGC has relatively healthy positive leverage to crude prices,
despite subsidy payments. However, we note 3Q numbers may have
exaggerated the impact. Prices of LPG in India, for example, are set
monthly at the beginning of every month. Calculated under recoveries
for downstream companies (and therefore ONGC’s share of subsidy
payments) would therefore lag increasing crude prices. Even if crude
and USD/INR stay at 3Q averages, ONGC subsidy payments would
increase in 4Q – net realisation would fall.
Worried on subsidy?
ONGC stock has been weak recently on concerns that subsidy
payments might breach the historical 33% share at high crude prices.
With impending share sale, this would seem unlikely in the near term.
ONGC currently trades at less than 10x earnings at about 4x EBITDA.
Its discount to global E&P peers has expanded to close to 40% now.
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