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UBS Investment Research
Oil & Natural Gas Corporation
Lower TP on delay in diesel price hike
„ Lower TP and earnings: We don’t expect a hike in diesel prices until May
Due to upcoming elections in five states and US$100/bbl+ oil prices we believe the
government will not raise diesel prices until May vs. our earlier expectation of
Feb/March. We hence cut our FY12/FY13 EPS by 5.3%/8.7% resp. on higher
subsidy burden. Going forward, we expect only modest price hikes of 5-6% biannually, though conservatively we factor only a 5% hike per year in our numbers.
„ Standalone earnings will be hit in a rising oil price environment
ONGC’s subsidy burden is the key earnings driver of its standalone business. If
there is no diesel price hike from current levels, then oil price realisation will only
be US$59/bbl. We expect post a diesel price hike of 5%, the average net crude
realisation in FY12 will be US$64/bbl. On a consolidated basis though, these
losses are offset as rising oil prices lead to improved contribution from OVL.
„ Government action is a key catalyst
Currently OMCs make a loss of Rs 12/litre on the sale of diesel, and diesel prices
need to be hiked by 30% to breakeven. At US$100/bbl annual under recovery will
be Rs 1.25 trillion of which GoI will need to pay Rs 800 bn. We believe this should
spur the govt to take action to reduce its subsidy by putting some burden on the
consumer. Additionally low price fuels will only push demand higher and increase
the fiscal burden.
„ Valuation: Reduce SOTP based PT to Rs 385/share from Rs 400/share
The stock has fallen 17% over the last 6 months and lagged the market by 14% on
fears of increasing subsidy burden and looks attractive at current levels.
Effect on earnings of a diesel price hike
ONGC’s subsidy burden is the key earnings driver of its standalone business. If
there is no diesel price hike from current levels then oil price realisation will
only be US$59/bbl. We expect post a diesel price hike of 5%, the average crude
realisation in FY12 will be US$64/bbl. For the first 9 months of FY11, ONGC’s
average net crude realisation was US$58.72/bbl and we expect FY11 net
realisation to be US$61.5/bbl.
On a consolidated basis though, the loss due to rising oil prices and higher
subsidies is offset by the improved earnings from the international business. But
as prices remain constant on a nominal basis and in fact fall sharply on a real
term basis, demand will further increase. The rising volumes in diesel sales will
increase the subsidy burden of the government of which ONGC bears a fixed
percentage.
Price target Derivation
Rs/share
ONGC Standalone 286
OVL 70
Investments 12
Royalty upside 5
Cash less minority 13
Price Target 385
Source: UBS estimates
Q Oil & Natural Gas Corporation
ONGC is the largest oil exploration and production companies in India. It has
reserves of approximately 1.0bn tonnes of oil and oil equivalent gas. ONGC has
one of the lowest finding, development, and lifting costs, and reasonably high
reserve/production ratios. ONGC is 74% owned by the government of India. It
operates in a regulated market whereby the government controls crude and gas
pricing. Its FY09 revenue was US$23.78bn.
Q Statement of Risk
Subsidy burden is the main risk for ONGC. The company subsidises crude oil to
the OMCs (Oil marketing companies) which sell petrol, diesel, kerosene and
LPG at lower than market regulated prices. E&P business in general is risky by
nature as the success of exploration is probabilistic.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Oil & Natural Gas Corporation
Lower TP on delay in diesel price hike
„ Lower TP and earnings: We don’t expect a hike in diesel prices until May
Due to upcoming elections in five states and US$100/bbl+ oil prices we believe the
government will not raise diesel prices until May vs. our earlier expectation of
Feb/March. We hence cut our FY12/FY13 EPS by 5.3%/8.7% resp. on higher
subsidy burden. Going forward, we expect only modest price hikes of 5-6% biannually, though conservatively we factor only a 5% hike per year in our numbers.
„ Standalone earnings will be hit in a rising oil price environment
ONGC’s subsidy burden is the key earnings driver of its standalone business. If
there is no diesel price hike from current levels, then oil price realisation will only
be US$59/bbl. We expect post a diesel price hike of 5%, the average net crude
realisation in FY12 will be US$64/bbl. On a consolidated basis though, these
losses are offset as rising oil prices lead to improved contribution from OVL.
„ Government action is a key catalyst
Currently OMCs make a loss of Rs 12/litre on the sale of diesel, and diesel prices
need to be hiked by 30% to breakeven. At US$100/bbl annual under recovery will
be Rs 1.25 trillion of which GoI will need to pay Rs 800 bn. We believe this should
spur the govt to take action to reduce its subsidy by putting some burden on the
consumer. Additionally low price fuels will only push demand higher and increase
the fiscal burden.
„ Valuation: Reduce SOTP based PT to Rs 385/share from Rs 400/share
The stock has fallen 17% over the last 6 months and lagged the market by 14% on
fears of increasing subsidy burden and looks attractive at current levels.
Effect on earnings of a diesel price hike
ONGC’s subsidy burden is the key earnings driver of its standalone business. If
there is no diesel price hike from current levels then oil price realisation will
only be US$59/bbl. We expect post a diesel price hike of 5%, the average crude
realisation in FY12 will be US$64/bbl. For the first 9 months of FY11, ONGC’s
average net crude realisation was US$58.72/bbl and we expect FY11 net
realisation to be US$61.5/bbl.
On a consolidated basis though, the loss due to rising oil prices and higher
subsidies is offset by the improved earnings from the international business. But
as prices remain constant on a nominal basis and in fact fall sharply on a real
term basis, demand will further increase. The rising volumes in diesel sales will
increase the subsidy burden of the government of which ONGC bears a fixed
percentage.
Price target Derivation
Rs/share
ONGC Standalone 286
OVL 70
Investments 12
Royalty upside 5
Cash less minority 13
Price Target 385
Source: UBS estimates
Q Oil & Natural Gas Corporation
ONGC is the largest oil exploration and production companies in India. It has
reserves of approximately 1.0bn tonnes of oil and oil equivalent gas. ONGC has
one of the lowest finding, development, and lifting costs, and reasonably high
reserve/production ratios. ONGC is 74% owned by the government of India. It
operates in a regulated market whereby the government controls crude and gas
pricing. Its FY09 revenue was US$23.78bn.
Q Statement of Risk
Subsidy burden is the main risk for ONGC. The company subsidises crude oil to
the OMCs (Oil marketing companies) which sell petrol, diesel, kerosene and
LPG at lower than market regulated prices. E&P business in general is risky by
nature as the success of exploration is probabilistic.
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