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ONGC (ONGC.BO, Buy, on Conviction list)
Source of opportunity
We upgrade ONGC (ONGC.BO) to Buy from Neutral and add it to our
Asia Pacific Conviction Buy list, based on stable to improving oil
realizations, improving volume growth and attractive valuations.
We believe that ONGC represents a good defensive stock to own in case
we witness oil demand destruction due to oil prices spiking up from
here. ONGC’s realizations typically remain steady even when oil prices
are volatile. We also believe potential government action leading to fuel
price increases will be positive for ONGC and should lead to a lower
share of under-recoveries going forward, resulting in stable to
improving oil realization. Also, we note that ONGC’s FY11 production
numbers increased strongly (3.5% growth vs. our expectation of 2%),
largely driven by higher overseas production. We expect production to
rise faster over the next two years as ONGC’s production in Brazil has
ramped up earlier than we expected, and on account of the decline in
domestic production having been arrested by the use of IOR/EOR
schemes, resulting in earnings upside in FY12-13E.
The government plans to divest a 5% stake in ONGC in June to meet its
divestment targets for reining in fiscal deficit. In our view, this increases
the likelihood of the government going in for early regulatory action on
fuel price increases, post key state elections in May, in our view.
We also expect ONGC’s volumes to benefit from the ramp-up of Cairns
fields in Rajasthan (in which ONGC has a 30% stake), irrespective of any
change in the current royalty structure.
Catalysts
1) Government action raising fuel prices; 2) likely upgrades in consensus
FY12E/13E earnings; 3) production growth through new field
developments & IOR/ EOR schemes; 4) domestic and overseas
exploration upside; 5) updates on shale gas pilot project and CBM
blocks.
Valuation
We revise our FY12E-13E consolidated earnings by 3%-9%, reflecting our
new production forecasts and net realization estimates. Consequently,
we increase our 12-month price target for ONGC to Rs360 (earlier
Rs325), based on EV/GCI vs. CROCI/WACC framework, implying
potential upside of 18%. Our valuation now assumes ONGC’s net oil
realization at US$57.9/bbl in FY12E and US$61.2/bbl in FY13E vs.
US$ 55.1/bbl and US$56.4/bbl previously.
Key risks
Key risks to our price target and investment view include: 1) delay in
policy action on fuel pricing; 2) high subsidy burden from rising oil price;
3) lower production from legacy E&P fields and 4) over-paying for
overseas acquisitions.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
ONGC (ONGC.BO, Buy, on Conviction list)
Source of opportunity
We upgrade ONGC (ONGC.BO) to Buy from Neutral and add it to our
Asia Pacific Conviction Buy list, based on stable to improving oil
realizations, improving volume growth and attractive valuations.
We believe that ONGC represents a good defensive stock to own in case
we witness oil demand destruction due to oil prices spiking up from
here. ONGC’s realizations typically remain steady even when oil prices
are volatile. We also believe potential government action leading to fuel
price increases will be positive for ONGC and should lead to a lower
share of under-recoveries going forward, resulting in stable to
improving oil realization. Also, we note that ONGC’s FY11 production
numbers increased strongly (3.5% growth vs. our expectation of 2%),
largely driven by higher overseas production. We expect production to
rise faster over the next two years as ONGC’s production in Brazil has
ramped up earlier than we expected, and on account of the decline in
domestic production having been arrested by the use of IOR/EOR
schemes, resulting in earnings upside in FY12-13E.
The government plans to divest a 5% stake in ONGC in June to meet its
the likelihood of the government going in for early regulatory action on
fuel price increases, post key state elections in May, in our view.
We also expect ONGC’s volumes to benefit from the ramp-up of Cairns
fields in Rajasthan (in which ONGC has a 30% stake), irrespective of any
change in the current royalty structure.
Catalysts
1) Government action raising fuel prices; 2) likely upgrades in consensus
FY12E/13E earnings; 3) production growth through new field
developments & IOR/ EOR schemes; 4) domestic and overseas
exploration upside; 5) updates on shale gas pilot project and CBM
blocks.
Valuation
We revise our FY12E-13E consolidated earnings by 3%-9%, reflecting our
new production forecasts and net realization estimates. Consequently,
we increase our 12-month price target for ONGC to Rs360 (earlier
Rs325), based on EV/GCI vs. CROCI/WACC framework, implying
potential upside of 18%. Our valuation now assumes ONGC’s net oil
realization at US$57.9/bbl in FY12E and US$61.2/bbl in FY13E vs.
US$ 55.1/bbl and US$56.4/bbl previously.
Key risks
Key risks to our price target and investment view include: 1) delay in
policy action on fuel pricing; 2) high subsidy burden from rising oil price;
3) lower production from legacy E&P fields and 4) over-paying for
overseas acquisitions.
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