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For 3QFY2011, ONGC’s bottom-line spiked 132% yoy to `7,083cr (`3,054cr), which
was substantially higher than our estimate of `5,475cr on account of lower-thanexpected
DD&A costs and gas pool receipts. We recommend a Buy on the stock.
Operating performance (ex gas pool) in line; DD&A below expectation: ONGC’s
performance was boosted by receipts of `1,898cr from the gas pool account, which
was not captured in our estimate and thus bottom-line was much higher than our
expectation. Ignoring the gas pool receipts, ONGC’s top-line and bottom-line
performance was marginally higher than our expectation. Operating income (ex-gas
pool receipts) during the quarter increased by 21.9% yoy to `18,906cr (`15,506cr) on
account of the higher crude oil sales and realisations. Crude oil sales volume
increased to 5.88MMT (5.67MMT) on account of higher production from Cairn’s
Rajasthan field. Gross realisations and net realisations, which stood at
US $89.1/bbl and US $64.8/bbl respectively, during the quarter, were in line with our
estimates. During the quarter, the company shared a subsidy burden of `4,222cr
(`3,497cr). EBITDA stood at `13,532cr (`9,335cr), a substantial rise of 45% yoy.
However, even after adjusting for the gas pool receipts, EBITDA registered robust
growth of 24.6% yoy to `11,634cr (`9,335cr) and marginally higher than our
expectation of `11,278cr. Depreciation, depletion and amortisation cost (DD&A) cost
was substantially lower by 22.1% yoy to `3,641cr (`4,676cr), which was lower than
our estimates, on account of lower dry wells written off during the quarter. Other
income came in substantially higher at `669cr as against loss of `30cr in 3QFY2010
as then there was reversal of interest income of `440cr on the loans given to OVL.
Thus, on account of better operating performance and gas pool receipts, net profit for
the quarter spiked 132% yoy to `7,083cr (`3,054cr).
Outlook and Valuation: We believe the risk-reward ratio is now favourable with limited
downside from current levels. Moreover, chances of the stock being re-rated have
strengthened on the back of higher volumes and net realisation. We recommend a
Buy on the stock, with a SOTP-based Target Price of `1,400.
EBITDA (ex-gas pool receipts) marginally higher than estimated: EBITDA during the
quarter stood at `13,532cr (`9,335cr), a substantial rise of 45% yoy on account of
the gas pool receipt in the form of TDR’s of `1,898cr in accordance with the
directive of MoP&NG. However, even after adjusting for the gas pool receipts,
EBITDA registered a robust growth of 24.6% yoy to `11,634cr (`9,335cr),
marginally higher than our expectation of `11,278cr. Similarly, OPM during the
quarter expanded by 484bp yoy to 65% (60.2%) on account of higher net
realisation and gas pool receipts. However, adjusting for gas pool receipts, OPM
was in line with our estimate of 61%. Thus, operating performance was robust
despite the company sharing a higher yoy subsidy burden of `4,222cr (`3,497cr).
DD&A cost decreases; while other income higher due to reversal in 3QFY2010:
Depreciation, depletion and amortisation cost (DD&A) cost was substantially lower
by 22.1% yoy to `3,641cr (`4,676cr), which was lower than our estimates, on
account of lower dry wells written off during the quarter. Other income during the
quarter was substantially higher at `669cr as against loss of `30cr in 3QFY2010
as then there was a reversal of interest income of `440cr on loans given to OVL.
PAT increases by 132% yoy: Net profit during the quarter spiked 132% yoy to
`7,083cr (`3,054cr), which was substantially higher than our estimate of `5,475cr
on account of lower-than-expected DD&A cost and gas pool receipts.
Investment Arguments
Net realisation expected to stabilise: We expect ONGC’s net realisation to stabilise
at current levels, considering that the upstream contribution to subsidy burden is
capped at 1/3rd of the total under recoveries. Even though the OMCs are bearing
under recoveries of ~6/ltr on diesel, ONGC reported net realisation of $65/bl.
We believe higher crude oil price will provoke a diesel price hike. Similarly, lower
crude oil price ($75-80) could pave way for deregulation. Thus, net realisation is
expected to stabilise in the range of $60-63/bl. We have assumed net realisation
of $60 for FY2011 and $61/bl for FY2012. ONGC’s stock performance is strongly
correlated with reforms in the Indian oil and gas sector. Reforms in diesel
regulations and clarity over the subsidy-sharing mechanism are likely to further
improve ONGC’s profitability and earnings visibility.
Volumes expected to further boost valuations: Management expects incremental oil
production from marginal fields including D1 extension, B193 cluster, B22 clusters,
North Tapti, WO series, B46 cluster, cluster 7, and B193 as well as B series. It has
guided an incremental crude oil production of 36,500 barrels a day in 2012 and
112,000bopd in 2013. As far as gas is concerned, North Tapti, B193 and 28
cluster, B22 cluster WO series cluster, B46 cluster, cluster 7, and B series would be
adding to the production. The total gas production expected from these fields is
5.4 million cubic meter per day in 2012, and 11 million cubic meters per day in
2013.
Outlook and Valuation
We expect crude oil price to stabilise within the range of $80-85/bl. We expect net
realisation to stay buoyant ($60/bl) on account of reforms undertaken by oil
ministry in the recent past.
Incremental production from the marginal fields is expected to more than offset
any decline in production from the ageing fields. OVL is also expected to report
jump in volumes by 2013 at ~12mn tonnes on the back incremental productions
from Myanmar, Sakhalin-1 and Venezuela coming on stream.
Deregulation of diesel and resolution of royalty issue with Cairn could be
significantly earnings accretive for ONGC. Higher gas price from extant fields and
mark-to-market prices from incremental production could accrete earnings further.
Significant discoveries in high potential Cambay, KG basin and Mahanadi fields
(still under appraisal) could further boost valuations.
We believe the risk-reward ratio is now favourable with limited downside from
current levels. Moreover, the chances of the stock being re-rated have
strengthened on the back of higher volumes and net realisation. At `1,136, the
stock is trading at 8.8x FY2012E EPS of `128.8. We recommend a Buy on the
stock, with a SOTP-based Target Price of `1,400, translating into an upside of
23.3% from current levels.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
ONGC – 3QFY2011 Result Update
Angel Broking recommends a Buy on ONGC with a Target Price of Rs. 1,400
For 3QFY2011, ONGC’s bottom-line spiked 132% yoy to `7,083cr (`3,054cr), which
was substantially higher than our estimate of `5,475cr on account of lower-thanexpected
DD&A costs and gas pool receipts. We recommend a Buy on the stock.
Operating performance (ex gas pool) in line; DD&A below expectation: ONGC’s
performance was boosted by receipts of `1,898cr from the gas pool account, which
was not captured in our estimate and thus bottom-line was much higher than our
expectation. Ignoring the gas pool receipts, ONGC’s top-line and bottom-line
performance was marginally higher than our expectation. Operating income (ex-gas
pool receipts) during the quarter increased by 21.9% yoy to `18,906cr (`15,506cr) on
account of the higher crude oil sales and realisations. Crude oil sales volume
increased to 5.88MMT (5.67MMT) on account of higher production from Cairn’s
Rajasthan field. Gross realisations and net realisations, which stood at
US $89.1/bbl and US $64.8/bbl respectively, during the quarter, were in line with our
estimates. During the quarter, the company shared a subsidy burden of `4,222cr
(`3,497cr). EBITDA stood at `13,532cr (`9,335cr), a substantial rise of 45% yoy.
However, even after adjusting for the gas pool receipts, EBITDA registered robust
growth of 24.6% yoy to `11,634cr (`9,335cr) and marginally higher than our
expectation of `11,278cr. Depreciation, depletion and amortisation cost (DD&A) cost
was substantially lower by 22.1% yoy to `3,641cr (`4,676cr), which was lower than
our estimates, on account of lower dry wells written off during the quarter. Other
income came in substantially higher at `669cr as against loss of `30cr in 3QFY2010
as then there was reversal of interest income of `440cr on the loans given to OVL.
Thus, on account of better operating performance and gas pool receipts, net profit for
the quarter spiked 132% yoy to `7,083cr (`3,054cr).
Outlook and Valuation: We believe the risk-reward ratio is now favourable with limited
downside from current levels. Moreover, chances of the stock being re-rated have
strengthened on the back of higher volumes and net realisation. We recommend a
Buy on the stock, with a SOTP-based Target Price of `1,400.
Net crude realisation higher at US $64.8/bbl: ONGC’s top-line performance during
the quarter was boosted by receipts of `1,898cr from the gas pool account, which was
not captured in our estimates, and thus top-line stood at robust `20,804cr, much
higher than our expectation of `18,488cr. Ignoring the gas pool receipts, ONGC’s
top-line performance was marginally higher than our expectation. Operating income
(ex-gas pool receipts) during the quarter increased by 21.9% yoy to `18,906cr
(`15,506cr) on account of the higher crude oil sales volume and net realisations.
ONGC’s net realisation, which stood at US $64.8/bbl, was in line with our
expectations. ONGC’s gross realisations from crude oil sales stood at
US $89.1/bbl (US $76.7/bbl), up 16.3% yoy. During the quarter, the company
shared a subsidy burden of `4,222cr (`3,497cr). Thus, despite higher subsidy
burden (an increase of 20.7% yoy and 39.8% qoq), net realisation stood higher at
$64.8/bbl vis-à-vis $62.8/bbl in 2QFY2011 and $57.7/bbl in 3QFY2010.
Besides, crude oil production increased 5.9% yoy and 2.6% qoq to 7.03 MMT, on
account of ramp up at Rajasthan fields. However, stronger rupee (3.8% yoy and
3.5% qoq) impacted realisations in rupee terms restricting significant spurt in sales.
Gas production was lower by 1.9% yoy on account of dip in production at Panna
and Mukta fields. Sales-to-production ratio was lower on account of inventory
building, resulting in relatively lesser growth in sales. Crude oil sales were lower by
0.7% qoq at 5.9MMT. Gas sales were also lower by 4.6% yoy and 0.6% qoq at
5.01BCM.
EBITDA (ex-gas pool receipts) marginally higher than estimated: EBITDA during the
quarter stood at `13,532cr (`9,335cr), a substantial rise of 45% yoy on account of
the gas pool receipt in the form of TDR’s of `1,898cr in accordance with the
directive of MoP&NG. However, even after adjusting for the gas pool receipts,
EBITDA registered a robust growth of 24.6% yoy to `11,634cr (`9,335cr),
marginally higher than our expectation of `11,278cr. Similarly, OPM during the
quarter expanded by 484bp yoy to 65% (60.2%) on account of higher net
realisation and gas pool receipts. However, adjusting for gas pool receipts, OPM
was in line with our estimate of 61%. Thus, operating performance was robust
despite the company sharing a higher yoy subsidy burden of `4,222cr (`3,497cr).
DD&A cost decreases; while other income higher due to reversal in 3QFY2010:
Depreciation, depletion and amortisation cost (DD&A) cost was substantially lower
by 22.1% yoy to `3,641cr (`4,676cr), which was lower than our estimates, on
account of lower dry wells written off during the quarter. Other income during the
quarter was substantially higher at `669cr as against loss of `30cr in 3QFY2010
as then there was a reversal of interest income of `440cr on loans given to OVL.
PAT increases by 132% yoy: Net profit during the quarter spiked 132% yoy to
`7,083cr (`3,054cr), which was substantially higher than our estimate of `5,475cr
on account of lower-than-expected DD&A cost and gas pool receipts.
Investment Arguments
Net realisation expected to stabilise: We expect ONGC’s net realisation to stabilise
at current levels, considering that the upstream contribution to subsidy burden is
capped at 1/3rd of the total under recoveries. Even though the OMCs are bearing
under recoveries of ~6/ltr on diesel, ONGC reported net realisation of $65/bl.
We believe higher crude oil price will provoke a diesel price hike. Similarly, lower
crude oil price ($75-80) could pave way for deregulation. Thus, net realisation is
expected to stabilise in the range of $60-63/bl. We have assumed net realisation
of $60 for FY2011 and $61/bl for FY2012. ONGC’s stock performance is strongly
correlated with reforms in the Indian oil and gas sector. Reforms in diesel
regulations and clarity over the subsidy-sharing mechanism are likely to further
improve ONGC’s profitability and earnings visibility.
Volumes expected to further boost valuations: Management expects incremental oil
production from marginal fields including D1 extension, B193 cluster, B22 clusters,
North Tapti, WO series, B46 cluster, cluster 7, and B193 as well as B series. It has
guided an incremental crude oil production of 36,500 barrels a day in 2012 and
112,000bopd in 2013. As far as gas is concerned, North Tapti, B193 and 28
cluster, B22 cluster WO series cluster, B46 cluster, cluster 7, and B series would be
adding to the production. The total gas production expected from these fields is
5.4 million cubic meter per day in 2012, and 11 million cubic meters per day in
2013.
Outlook and Valuation
We expect crude oil price to stabilise within the range of $80-85/bl. We expect net
realisation to stay buoyant ($60/bl) on account of reforms undertaken by oil
ministry in the recent past.
Incremental production from the marginal fields is expected to more than offset
any decline in production from the ageing fields. OVL is also expected to report
jump in volumes by 2013 at ~12mn tonnes on the back incremental productions
from Myanmar, Sakhalin-1 and Venezuela coming on stream.
Deregulation of diesel and resolution of royalty issue with Cairn could be
significantly earnings accretive for ONGC. Higher gas price from extant fields and
mark-to-market prices from incremental production could accrete earnings further.
Significant discoveries in high potential Cambay, KG basin and Mahanadi fields
(still under appraisal) could further boost valuations.
We believe the risk-reward ratio is now favourable with limited downside from
current levels. Moreover, the chances of the stock being re-rated have
strengthened on the back of higher volumes and net realisation. At `1,136, the
stock is trading at 8.8x FY2012E EPS of `128.8. We recommend a Buy on the
stock, with a SOTP-based Target Price of `1,400, translating into an upside of
23.3% from current levels.
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