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Oil & Natural Gas Corporation (ONGC)
Energy
A solid quarter, finally. ONGC reported strong 3QFY11 standalone net income at
`70.8 bn (+31.4% qoq, +132% yoy) versus our estimate of `59.5 bn with certain oneoffs
contributing to the large beat. Adjusted net income at `57.8 bn was marginally
below our estimate with other expenditure surprising negatively. We maintain our BUY
rating noting 25% potential upside to our revised target price of `1,420 (`1,500
previously). ONGC stock price is currently discounting net crude price realization of
US$46/bbl in FY2012E versus US$58.7/bbl in 9MFY11.
3QFY11 EBITDA at `116.3 bn (+24.6% yoy, +2.8% qoq)
ONGC reported 3QFY11 net income (standalone) at `70.8 bn (+31.4% qoq, 132% yoy) versus our
estimate of `59.5 bn. The higher-than-expected net income reflects (1) receipt of gas pool money
of `18.98 bn, (2) lower subsidy burden at `42.2 bn versus our estimate of `44 bn and (3) lowerthan-
expected DD&A expenses at `36.4 bn versus our estimate of `44.1 bn. This was partially
compensated by higher other expenditure at `29.1 bn versus our expected `25.5 bn. ONGC’s
3QFY11 EBITDA was at `116.3 bn (+2.8% qoq, +24.6% yoy) versus our estimate of `122.2 bn.
The yoy improvement in EBITDA reflects (1) higher net crude price realization at US$64.8/bbl
versus US$57.7/bbl, (2) higher APM gas price and (3) higher oil sales volumes.
`69 adjusted EPS in 9MFY11; do not see meaningful risk to our earnings estimates
We highlight that ONGC (standalone) has reported adjusted EPS of `69 in 9MFY11 (`27 in
3QFY11). We do not see meaningful risks to our FY2011E (consolidated) EPS of `113 (we estimate
OVL to contribute `14/share in FY2011E. We estimate ONGC’s FY2012E EPS at `130 with the yoy
increase reflecting (1) higher crude oil price assumptions boosting earnings from value added
products and OVL oil production, (2) full year of gas price deregulation, (3) higher oil production
from OVL (8.6mn tons versus 6.9 mn tons in FY2011E) and (4) higher oil production from Cairn’s
Rajasthan block.
Valuations attractive with limited downside risk
We find the current valuations attractive with the stock trading at 8.7X FY2012E EPS of `130. We
maintain BUY rating on the stock with a revised target price of `1,420 (`1,500 previously) based
on 10X FY2012E EPS plus value of investments. The change in target price reflects downward
revision of our FY2012E EPS estimate for ONGC to reflect no diesel deregulation in FY2012E.
Fine-tuned FY2011-13E EPS estimates
We have revised our FY2011-13E EPS to `113 (-2.9%), `130 (-5.7%) and `143 (-2.6%) to reflect
(1) higher crude price assumption for FY2011E, (2) higher under-recoveries in FY2012E as we
expect a delay in diesel deregulation to FY2013E, (3) 3QFY11 results and (4) other minor changes.
Key highlights of 3QFY11 results
Higher crude oil sales volume; lower gas sales volume. 3QFY11 crude sales volume
improved 3.7% yoy to 5.9 mn tons; our expectation was 5.8 mn tons. 3QFY11 gas sales
volume declined 3% yoy but increased 1% qoq to 5.09 bcm; our expectation was 5.16
bcm.
Net realized price for crude oil increased qoq and yoy. 3QFY11 net realized crude
price was US$64.8/bbl versus US$62.8/bbl in 2QFY11 and US$57.7/bbl in 3QFY10.
ONGC’s subsidy burden in 3QFY11 was `42.2 bn or US$24.3/bbl in crude price
equivalent terms versus crude price equivalent of US$16.5/bbl in 2QFY11 and US$19/bbl
in 3QFY10; our estimate was `44 bn. We note ONGC’s share among upstream
companies was 81.2% in 3QFY11 versus 80.2% in 2QFY11.
DD&A expenses surprised positively. ONGC’s DD&A expenses were at `36.4 bn (-
17.3% qoq, -22.1% yoy) versus our estimate of `44.1 bn. The decline in DD&A expenses
was primarily due to lower expenses for dry wells at `13.6 bn (-44% qoq, -45% yoy).
Stock looks attractive under different scenarios of diesel deregulation and
subsidy-sharing
No diesel deregulation in FY2012E and 33.3% subsidy borne by upstream
companies. In this base-case scenario we assume that diesel deregulation will not take
place in FY2012E. We compute ONGC’s FY2012E EPS at `130 under this scenario based
on (1) gross under-recoveries at `808 bn, (2) crude oil price (Dated Brent) of US$85/bbl
and (3) share of upstream companies at 33.3%. This results in net realization of
US$56.3/bbl compared to 58.7/bbl in 9MFY11. We compute ONGC’s fair value at
`1,420/share based on 10X FY2012E plus value of investments. We see potential upside
of 25% under this scenario.
Diesel deregulation by 3QFY12E and 33.3% subsidy borne by upstream companies.
We compute ONGC’s FY2012E EPS at `142 under this scenario based on (1) gross underrecoveries
at `656 bn, (2) crude oil price (Dated Brent) of US$85/bbl and (3) share of
upstream companies at 33.3%. We compute ONGC’s fair value at `1,535/share based on
10X FY2012E plus value of investments. We see potential upside of 35% under this
scenario. In this scenario, ONGC’s net crude oil price realization increases to US$62.4/bbl.
No diesel deregulation in FY2012E and 40% subsidy borne by upstream
companies. This is a hypothetical scenario reflecting street concerns of higher-thanexpected
subsidy burden being imposed on upstream companies. We compute ONGC’s
FY2012E EPS at `118 under this scenario based on (1) gross under-recoveries at `808 bn,
(2) crude oil price (Dated Brent) of US$85/bbl and (3) share of upstream companies at
40%. We compute ONGC’s fair value at `1,300/share based on 10X FY2012E plus value
of investments. We see potential upside of 15% under this scenario. ONGC’s net crude
oil price realization would drop to US$50.1/bbl in this scenario.
Key assumptions behind our earnings model
We discuss our key assumptions behind our earnings model below. Exhibit 3 gives the major
assumptions behind our earnings model and Exhibit 4 gives sensitivity of ONGC’s EPS to key
variables (rupee-dollar rate, crude oil price, natural gas price).
Subsidy amount. We model subsidy amount for FY2011E, FY2012E and FY2013E at
`194 bn, `210 bn and `135 bn. We now assume diesel deregulation to be implemented
from FY2013E versus our earlier assumption of 3QFY12E. We assume that upstream
companies will bear one-third of the overall under-recoveries and ONGC will bear 81.3%
of the share of upstream companies. This is in line with the subsidy sharing of upstream
companies in 9MFY11. We note that share of upstream companies has been 29-31% in
the last three years.
Crude oil price assumption. We model FY2011E, FY2012E and FY2013E crude oil
(Dated Brent) price at US$83/bbl, US$85/bbl and US$85/bbl. However, we would focus
more on ONGC’s net realized crude price and our long-term crude price assumption.
Exhibit 5 gives ONGC’s historical net realized price and our expectations for FY2011E
(US$56.5/bbl), FY2012E (US$56.3/bbl) and FY2013E (US$67.2/bbl).
Natural gas price assumption. We assume FY2011E, FY2012E and FY2013E natural gas
price at `6.8/cu m, `7.5/cu m and `7.5/cu m.
Exchange rate assumption. We model exchange rate for FY2011E, FY2012E and
FY2013E at `45.6/US$, `45.5/US$ and `44/US$.
Fair value of ONGC (`/share)
FY2012E EPS 130
Less: income from investments valued separately 2
Adjusted EPS for FY2012E 128
P/E (X) 1 0
Valuation 1,283
Investments 70
Indian Oil Corp. 50
GAIL 15
Petronet LNG 5
New discoveries 6 5
Fair value 1,418
Source: Kotak Institutional Equities estimates
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Oil & Natural Gas Corporation (ONGC)
Energy
A solid quarter, finally. ONGC reported strong 3QFY11 standalone net income at
`70.8 bn (+31.4% qoq, +132% yoy) versus our estimate of `59.5 bn with certain oneoffs
contributing to the large beat. Adjusted net income at `57.8 bn was marginally
below our estimate with other expenditure surprising negatively. We maintain our BUY
rating noting 25% potential upside to our revised target price of `1,420 (`1,500
previously). ONGC stock price is currently discounting net crude price realization of
US$46/bbl in FY2012E versus US$58.7/bbl in 9MFY11.
3QFY11 EBITDA at `116.3 bn (+24.6% yoy, +2.8% qoq)
ONGC reported 3QFY11 net income (standalone) at `70.8 bn (+31.4% qoq, 132% yoy) versus our
estimate of `59.5 bn. The higher-than-expected net income reflects (1) receipt of gas pool money
of `18.98 bn, (2) lower subsidy burden at `42.2 bn versus our estimate of `44 bn and (3) lowerthan-
expected DD&A expenses at `36.4 bn versus our estimate of `44.1 bn. This was partially
compensated by higher other expenditure at `29.1 bn versus our expected `25.5 bn. ONGC’s
3QFY11 EBITDA was at `116.3 bn (+2.8% qoq, +24.6% yoy) versus our estimate of `122.2 bn.
The yoy improvement in EBITDA reflects (1) higher net crude price realization at US$64.8/bbl
versus US$57.7/bbl, (2) higher APM gas price and (3) higher oil sales volumes.
`69 adjusted EPS in 9MFY11; do not see meaningful risk to our earnings estimates
We highlight that ONGC (standalone) has reported adjusted EPS of `69 in 9MFY11 (`27 in
3QFY11). We do not see meaningful risks to our FY2011E (consolidated) EPS of `113 (we estimate
OVL to contribute `14/share in FY2011E. We estimate ONGC’s FY2012E EPS at `130 with the yoy
increase reflecting (1) higher crude oil price assumptions boosting earnings from value added
products and OVL oil production, (2) full year of gas price deregulation, (3) higher oil production
from OVL (8.6mn tons versus 6.9 mn tons in FY2011E) and (4) higher oil production from Cairn’s
Rajasthan block.
Valuations attractive with limited downside risk
We find the current valuations attractive with the stock trading at 8.7X FY2012E EPS of `130. We
maintain BUY rating on the stock with a revised target price of `1,420 (`1,500 previously) based
on 10X FY2012E EPS plus value of investments. The change in target price reflects downward
revision of our FY2012E EPS estimate for ONGC to reflect no diesel deregulation in FY2012E.
Fine-tuned FY2011-13E EPS estimates
We have revised our FY2011-13E EPS to `113 (-2.9%), `130 (-5.7%) and `143 (-2.6%) to reflect
(1) higher crude price assumption for FY2011E, (2) higher under-recoveries in FY2012E as we
expect a delay in diesel deregulation to FY2013E, (3) 3QFY11 results and (4) other minor changes.
Key highlights of 3QFY11 results
Higher crude oil sales volume; lower gas sales volume. 3QFY11 crude sales volume
improved 3.7% yoy to 5.9 mn tons; our expectation was 5.8 mn tons. 3QFY11 gas sales
volume declined 3% yoy but increased 1% qoq to 5.09 bcm; our expectation was 5.16
bcm.
Net realized price for crude oil increased qoq and yoy. 3QFY11 net realized crude
price was US$64.8/bbl versus US$62.8/bbl in 2QFY11 and US$57.7/bbl in 3QFY10.
ONGC’s subsidy burden in 3QFY11 was `42.2 bn or US$24.3/bbl in crude price
equivalent terms versus crude price equivalent of US$16.5/bbl in 2QFY11 and US$19/bbl
in 3QFY10; our estimate was `44 bn. We note ONGC’s share among upstream
companies was 81.2% in 3QFY11 versus 80.2% in 2QFY11.
DD&A expenses surprised positively. ONGC’s DD&A expenses were at `36.4 bn (-
17.3% qoq, -22.1% yoy) versus our estimate of `44.1 bn. The decline in DD&A expenses
was primarily due to lower expenses for dry wells at `13.6 bn (-44% qoq, -45% yoy).
Stock looks attractive under different scenarios of diesel deregulation and
subsidy-sharing
No diesel deregulation in FY2012E and 33.3% subsidy borne by upstream
companies. In this base-case scenario we assume that diesel deregulation will not take
place in FY2012E. We compute ONGC’s FY2012E EPS at `130 under this scenario based
on (1) gross under-recoveries at `808 bn, (2) crude oil price (Dated Brent) of US$85/bbl
and (3) share of upstream companies at 33.3%. This results in net realization of
US$56.3/bbl compared to 58.7/bbl in 9MFY11. We compute ONGC’s fair value at
`1,420/share based on 10X FY2012E plus value of investments. We see potential upside
of 25% under this scenario.
Diesel deregulation by 3QFY12E and 33.3% subsidy borne by upstream companies.
We compute ONGC’s FY2012E EPS at `142 under this scenario based on (1) gross underrecoveries
at `656 bn, (2) crude oil price (Dated Brent) of US$85/bbl and (3) share of
upstream companies at 33.3%. We compute ONGC’s fair value at `1,535/share based on
10X FY2012E plus value of investments. We see potential upside of 35% under this
scenario. In this scenario, ONGC’s net crude oil price realization increases to US$62.4/bbl.
No diesel deregulation in FY2012E and 40% subsidy borne by upstream
companies. This is a hypothetical scenario reflecting street concerns of higher-thanexpected
subsidy burden being imposed on upstream companies. We compute ONGC’s
FY2012E EPS at `118 under this scenario based on (1) gross under-recoveries at `808 bn,
(2) crude oil price (Dated Brent) of US$85/bbl and (3) share of upstream companies at
40%. We compute ONGC’s fair value at `1,300/share based on 10X FY2012E plus value
of investments. We see potential upside of 15% under this scenario. ONGC’s net crude
oil price realization would drop to US$50.1/bbl in this scenario.
Key assumptions behind our earnings model
We discuss our key assumptions behind our earnings model below. Exhibit 3 gives the major
assumptions behind our earnings model and Exhibit 4 gives sensitivity of ONGC’s EPS to key
variables (rupee-dollar rate, crude oil price, natural gas price).
Subsidy amount. We model subsidy amount for FY2011E, FY2012E and FY2013E at
`194 bn, `210 bn and `135 bn. We now assume diesel deregulation to be implemented
from FY2013E versus our earlier assumption of 3QFY12E. We assume that upstream
companies will bear one-third of the overall under-recoveries and ONGC will bear 81.3%
of the share of upstream companies. This is in line with the subsidy sharing of upstream
companies in 9MFY11. We note that share of upstream companies has been 29-31% in
the last three years.
Crude oil price assumption. We model FY2011E, FY2012E and FY2013E crude oil
(Dated Brent) price at US$83/bbl, US$85/bbl and US$85/bbl. However, we would focus
more on ONGC’s net realized crude price and our long-term crude price assumption.
Exhibit 5 gives ONGC’s historical net realized price and our expectations for FY2011E
(US$56.5/bbl), FY2012E (US$56.3/bbl) and FY2013E (US$67.2/bbl).
Natural gas price assumption. We assume FY2011E, FY2012E and FY2013E natural gas
price at `6.8/cu m, `7.5/cu m and `7.5/cu m.
Exchange rate assumption. We model exchange rate for FY2011E, FY2012E and
FY2013E at `45.6/US$, `45.5/US$ and `44/US$.
Fair value of ONGC (`/share)
FY2012E EPS 130
Less: income from investments valued separately 2
Adjusted EPS for FY2012E 128
P/E (X) 1 0
Valuation 1,283
Investments 70
Indian Oil Corp. 50
GAIL 15
Petronet LNG 5
New discoveries 6 5
Fair value 1,418
Source: Kotak Institutional Equities estimates
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