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1QFY12 results
ONGC’s 1QFY11 net profit of Rs41bn came 2% below our estimate on the back of
lower JV crude sales and a rise in profit petroleum share. Sharply lower Sakhalin
output is also likely to weigh on OVL’s 1Q profits. Decline in domestic crude as well
as gas production remains a concern. Indeed its poor production outlook precludes
a secular investment case but it should benefit from newsflow tailwinds related to
clarity of the upstream sharing formula ahead of the FPO, a potential cap on
subsidized LPG availability and a change in the contract terms at Cairn’s Rajasthan
block. Valuations at 3.5x Mar12 EV/Ebitda and 8x PE are also supportive. BUY.
Marginally lower 1QFY12 results
ONGC’s 1QFY12 PAT rose 12%YoY/47%QoQ to Rs41bn but was 2% below estimates.
Lower than expected JV crude sales volumes, higher profit petroleum sharing with the
government and higher admin costs led to a 2% miss on reported Ebitda (Rs93.5bn,
+15%YoY). Despite larger than expected dry well write offs due to writeoffs of two
deepwater wells in Andaman, overall DD&A was lower than expected. Other income
was also higher but was offset by no recovery from the gas pool as we had modelled.
While upstream subsidy sharing reverted to one-third in 1Q, inventory build up pulled
down sales and net crude price realisations to US$48.8/bbl (gross = US$121/bbl).
Domestic oil production continues to struggle; gas also declines
ONGC’s crude production trajectory continues to disappoint with 1QFY12 output from
its own fields down 2%YoY; ONGC attributes this to lower gains from sidetrack wells at
Mumbai High and high water-cut from the Vasai-East. Legacy JV volumes are also
down ~8% YoY in 1Q. After three years of growth, ONGC’s gas output also appears to
be trending down; production from own fields was down 0.3%YoY in FY11 and
2.7%YoY in 1QFY12. With gas production at Tapti and Ravva also declining rapidly,
legacy JV volumes were also down 15%YoY in 1Q and should remain under pressure.
Surprising decline in Sakhalin output; Venezuela and Imperial rise
ONGC also indicated that crude output in Sakhalin (possibly a temporary shutdown)
and Sudan (natural decline) dropped 8% and 3% QoQ offset by increases in Imperial
(+9%QoQ) and Venezuela (+14%). These are less profitable, though, in our view. A
33%QoQ fall in Sakhalin also drove a 5%QoQ decline in ONGC Videsh’s (OVL) gas
output. Lower output and mix should have weighed on OVL’s 1QFY12 profits.
Positive catalysts; maintain BUY with a target price of Rs375/sh
ONGC’s poor production trajectory precludes a secular investment case for the stock
but we expect it to benefit from newsflow tailwinds from a formalisation of the
upstream sharing formula ahead of the US$2.5bn FPO in 2HFY12 (we model onethird),
a potential cap on subsidized LPG availability (+4-5% on EPS under a 4-cylinder
cap) and a change in the contract terms at Cairn’s Rajasthan block (+6-10% if royalty
is cost recoverable). Valuations at 3.5x Mar12 EV/Ebitda and 8x PE are also supportive.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
1QFY12 results
ONGC’s 1QFY11 net profit of Rs41bn came 2% below our estimate on the back of
lower JV crude sales and a rise in profit petroleum share. Sharply lower Sakhalin
output is also likely to weigh on OVL’s 1Q profits. Decline in domestic crude as well
as gas production remains a concern. Indeed its poor production outlook precludes
a secular investment case but it should benefit from newsflow tailwinds related to
clarity of the upstream sharing formula ahead of the FPO, a potential cap on
subsidized LPG availability and a change in the contract terms at Cairn’s Rajasthan
block. Valuations at 3.5x Mar12 EV/Ebitda and 8x PE are also supportive. BUY.
Marginally lower 1QFY12 results
ONGC’s 1QFY12 PAT rose 12%YoY/47%QoQ to Rs41bn but was 2% below estimates.
Lower than expected JV crude sales volumes, higher profit petroleum sharing with the
government and higher admin costs led to a 2% miss on reported Ebitda (Rs93.5bn,
+15%YoY). Despite larger than expected dry well write offs due to writeoffs of two
deepwater wells in Andaman, overall DD&A was lower than expected. Other income
was also higher but was offset by no recovery from the gas pool as we had modelled.
While upstream subsidy sharing reverted to one-third in 1Q, inventory build up pulled
down sales and net crude price realisations to US$48.8/bbl (gross = US$121/bbl).
Domestic oil production continues to struggle; gas also declines
ONGC’s crude production trajectory continues to disappoint with 1QFY12 output from
its own fields down 2%YoY; ONGC attributes this to lower gains from sidetrack wells at
Mumbai High and high water-cut from the Vasai-East. Legacy JV volumes are also
down ~8% YoY in 1Q. After three years of growth, ONGC’s gas output also appears to
be trending down; production from own fields was down 0.3%YoY in FY11 and
2.7%YoY in 1QFY12. With gas production at Tapti and Ravva also declining rapidly,
legacy JV volumes were also down 15%YoY in 1Q and should remain under pressure.
Surprising decline in Sakhalin output; Venezuela and Imperial rise
ONGC also indicated that crude output in Sakhalin (possibly a temporary shutdown)
and Sudan (natural decline) dropped 8% and 3% QoQ offset by increases in Imperial
(+9%QoQ) and Venezuela (+14%). These are less profitable, though, in our view. A
33%QoQ fall in Sakhalin also drove a 5%QoQ decline in ONGC Videsh’s (OVL) gas
output. Lower output and mix should have weighed on OVL’s 1QFY12 profits.
Positive catalysts; maintain BUY with a target price of Rs375/sh
ONGC’s poor production trajectory precludes a secular investment case for the stock
but we expect it to benefit from newsflow tailwinds from a formalisation of the
upstream sharing formula ahead of the US$2.5bn FPO in 2HFY12 (we model onethird),
a potential cap on subsidized LPG availability (+4-5% on EPS under a 4-cylinder
cap) and a change in the contract terms at Cairn’s Rajasthan block (+6-10% if royalty
is cost recoverable). Valuations at 3.5x Mar12 EV/Ebitda and 8x PE are also supportive.
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