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● Expectations of a revised upstream subsidy policy ahead of the
proposed ONGC FPO are strong. The most popular version has
ONGC/ OILI realising a capped US$60/bbl, with a US$1/bbl
upside per US$10/bbl increase in crude prices above US$90/bbl.
● If this were instituted, FY11 EBITDA for ONGC/ OILI would have
been 12%/ 4% higher. Assuming ONGC’s multiples expanded to
6x post the implementation of this policy, the stock could be worth
about Rs387/share (Rs324 for a 5x); with upsides from a
favourable resolution of the Cairn royalty issue.
● Given the reduction in under recoveries due to the recent price
hikes and tax cuts, the US$60/bbl is a step down from the 33%
framework – but it eliminates the risk of the 33% itself changing
(as happened in FY11). Due to lost tax revenues, the govt. may
also end up paying more in FY12 than under the 33% scheme.
● The desire to sell ONGC stock may still see this happen. If
implemented, the new policy could reduce uncertainties on ONGC
EBITDA, but a limited upgrade, lack of near-term growth and the
overhang of the FPO may constrain stock price increases.
New subsidy policy on the cards?
Expectations that the govt. will institute a new upstream subsidy policy
(ahead of the proposed ONGC FPO) are strong. The most popular
version has ONGC/ OILI realising a capped US$60/bbl, with a
US$1/bbl upside per US$10/bbl increase in crude prices above
US$90/bbl. If this were instituted, FY11 EBITDA for ONGC/ OILI
would have been 12%/ 4% higher. Assuming similar proportions for
GAIL’s LPG businesses would mean its FY11 EBITDA would have
been 8% higher as well. The lower buoyancy for OILI is a result of it
historically making higher net realisations compared to ONGC
ONGC has traded at a discount to global E&P (currently averaging 6-
6.5x forward EBITDA) due to its subsidy issues. Assuming ONGC’s
multiples also expanded to 6x post the implementation of such a
policy, the stock could be worth about Rs387/share (Rs324 for 5x);
with upsides from a favourable resolution of the Cairn royalty issue.
Some issues with this US$60/bbl framework
Given meaningful reduction in industry under recoveries due to recent
retail price hikes and tax cuts, the US$60/bbl is a step down from the
original 33% variable subsidy share framework – but does away with the
risk that the 33% itself changes (as happened in FY11). Capped
revenues would also increase focus on increasing ONGC costs. Without
near-term volume upsides, expectations of flat-to-declining EBITDA may
be a constraint on any multiple expansion. This would, however, allow
investors to focus on the longer-term production outlook at ONGC. The
form in which this US$60/bbl would be assured (through an oral/ written
commitment by the Oil Ministry/ Finance Ministry) could also impact the
potential multiple for ONGC, we believe
FY12 Finance Ministry math may not add up though
We estimate the government has lost Rs368 bn (US$8.2bn) in FY12
revenues on the tax cuts implemented last week. Implementing the
US$60/bbl cap on upstream means the government would still have to
pay another Rs574 bn (US$12.8 bn) to fund residual FY12 losses;
taking its total effective payout to Rs942 bn (US$20.9 bn) at US$110/bbl
oil. This is US$3.1 bn higher than what the government would have paid
if it had stuck to the 33% upstream share of under-recoveries (without
counting savings from tax cuts). Prima facie, the Finance Ministry may
not be keen to implement this new scheme – but desire to sell c.US$3
bn of ONGC stock may help swing the decision.
If implemented, this new policy could reduce uncertainties on ONGC
EBITDA, but a limited upgrade, lack of near-term growth and over
hang of the FPO may constrain stock price increases.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
● Expectations of a revised upstream subsidy policy ahead of the
proposed ONGC FPO are strong. The most popular version has
ONGC/ OILI realising a capped US$60/bbl, with a US$1/bbl
upside per US$10/bbl increase in crude prices above US$90/bbl.
● If this were instituted, FY11 EBITDA for ONGC/ OILI would have
been 12%/ 4% higher. Assuming ONGC’s multiples expanded to
6x post the implementation of this policy, the stock could be worth
about Rs387/share (Rs324 for a 5x); with upsides from a
favourable resolution of the Cairn royalty issue.
● Given the reduction in under recoveries due to the recent price
hikes and tax cuts, the US$60/bbl is a step down from the 33%
framework – but it eliminates the risk of the 33% itself changing
(as happened in FY11). Due to lost tax revenues, the govt. may
also end up paying more in FY12 than under the 33% scheme.
● The desire to sell ONGC stock may still see this happen. If
implemented, the new policy could reduce uncertainties on ONGC
EBITDA, but a limited upgrade, lack of near-term growth and the
overhang of the FPO may constrain stock price increases.
New subsidy policy on the cards?
Expectations that the govt. will institute a new upstream subsidy policy
(ahead of the proposed ONGC FPO) are strong. The most popular
version has ONGC/ OILI realising a capped US$60/bbl, with a
US$1/bbl upside per US$10/bbl increase in crude prices above
US$90/bbl. If this were instituted, FY11 EBITDA for ONGC/ OILI
would have been 12%/ 4% higher. Assuming similar proportions for
GAIL’s LPG businesses would mean its FY11 EBITDA would have
been 8% higher as well. The lower buoyancy for OILI is a result of it
historically making higher net realisations compared to ONGC
ONGC has traded at a discount to global E&P (currently averaging 6-
6.5x forward EBITDA) due to its subsidy issues. Assuming ONGC’s
multiples also expanded to 6x post the implementation of such a
policy, the stock could be worth about Rs387/share (Rs324 for 5x);
with upsides from a favourable resolution of the Cairn royalty issue.
Some issues with this US$60/bbl framework
Given meaningful reduction in industry under recoveries due to recent
retail price hikes and tax cuts, the US$60/bbl is a step down from the
original 33% variable subsidy share framework – but does away with the
risk that the 33% itself changes (as happened in FY11). Capped
revenues would also increase focus on increasing ONGC costs. Without
near-term volume upsides, expectations of flat-to-declining EBITDA may
be a constraint on any multiple expansion. This would, however, allow
investors to focus on the longer-term production outlook at ONGC. The
form in which this US$60/bbl would be assured (through an oral/ written
commitment by the Oil Ministry/ Finance Ministry) could also impact the
potential multiple for ONGC, we believe
FY12 Finance Ministry math may not add up though
We estimate the government has lost Rs368 bn (US$8.2bn) in FY12
revenues on the tax cuts implemented last week. Implementing the
US$60/bbl cap on upstream means the government would still have to
pay another Rs574 bn (US$12.8 bn) to fund residual FY12 losses;
taking its total effective payout to Rs942 bn (US$20.9 bn) at US$110/bbl
oil. This is US$3.1 bn higher than what the government would have paid
if it had stuck to the 33% upstream share of under-recoveries (without
counting savings from tax cuts). Prima facie, the Finance Ministry may
not be keen to implement this new scheme – but desire to sell c.US$3
bn of ONGC stock may help swing the decision.
If implemented, this new policy could reduce uncertainties on ONGC
EBITDA, but a limited upgrade, lack of near-term growth and over
hang of the FPO may constrain stock price increases.
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