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Oil & Natural Gas Corp. (ONGC.BO)
Buy Equity Research
Risk-reward analysis suggests favourable stock returns; still CL-Buy
What's changed
There has been significant news flow this week in the media (e.g., Reuters)
speculating about higher subsidy burden for state-owned upstream
companies, leading to adverse stock reaction (ONGC has fallen 3% over
the past two days vs. Sensex +2%). Our conversations with industry
sources suggest that various subsidy proposals could remain under
discussion between the oil and finance ministries through March 2012 and
the stock is likely reacting to noise at this point. We conduct a risk-reward
analysis on ONGC to assess how its FY12E earnings would move under
various scenarios of subsidy burden. Meanwhile, the oil ministry has
issued an indicative order for upstream companies to share Rs75bn (33%
of Rs225bn of total under-recoveries) for 2QFY12.
Implications
Our risk-reward analysis of ONGC indicates that even in the worst-case
scenario, whereby the subsidy proposal being discussed in the media is
implemented, i.e., upstream companies share Rs567bn, or 33% of the
Rs1710bn of projected under-recoveries by the oil ministry as of June 26,
ONGC’s FY12E EPS would decline to Rs30.2 at the ytd average Brent oil
price of US$115/bbl. This compares with our base-case subsidy scenario
EPS of Rs33. FY12E EPS could range between Rs30.2-Rs40.9 under various
subsidy-sharing scenarios at US$115/bbl.
Valuation
We reiterate our Buy rating (on Conviction List) and our 12-month
Director’s Cut-based target price of Rs330, implying 26%potential upside.
Our valuation assumes ONGC’s net oil realization of US$53.5/bbl in FY12E.
Despite low operating and F&D costs, reasonable reserve replacement,
high reserve life, and attractive returns, ONGC is trading at FY12E EV/DACF
of 4.9X versus an eight-year historical range of 4.0X-9.5X.
Key risks
Spike in crude oil prices, higher subsidy burden, lower production.
INVESTMENT LIST MEMBERSHIP
Asia Pacific Buy List
Asia Pacific Conviction Buy List
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Oil & Natural Gas Corp. (ONGC.BO)
Buy Equity Research
Risk-reward analysis suggests favourable stock returns; still CL-Buy
What's changed
There has been significant news flow this week in the media (e.g., Reuters)
speculating about higher subsidy burden for state-owned upstream
companies, leading to adverse stock reaction (ONGC has fallen 3% over
the past two days vs. Sensex +2%). Our conversations with industry
sources suggest that various subsidy proposals could remain under
discussion between the oil and finance ministries through March 2012 and
the stock is likely reacting to noise at this point. We conduct a risk-reward
analysis on ONGC to assess how its FY12E earnings would move under
various scenarios of subsidy burden. Meanwhile, the oil ministry has
issued an indicative order for upstream companies to share Rs75bn (33%
of Rs225bn of total under-recoveries) for 2QFY12.
Implications
Our risk-reward analysis of ONGC indicates that even in the worst-case
scenario, whereby the subsidy proposal being discussed in the media is
implemented, i.e., upstream companies share Rs567bn, or 33% of the
Rs1710bn of projected under-recoveries by the oil ministry as of June 26,
ONGC’s FY12E EPS would decline to Rs30.2 at the ytd average Brent oil
price of US$115/bbl. This compares with our base-case subsidy scenario
EPS of Rs33. FY12E EPS could range between Rs30.2-Rs40.9 under various
subsidy-sharing scenarios at US$115/bbl.
Valuation
We reiterate our Buy rating (on Conviction List) and our 12-month
Director’s Cut-based target price of Rs330, implying 26%potential upside.
Our valuation assumes ONGC’s net oil realization of US$53.5/bbl in FY12E.
Despite low operating and F&D costs, reasonable reserve replacement,
high reserve life, and attractive returns, ONGC is trading at FY12E EV/DACF
of 4.9X versus an eight-year historical range of 4.0X-9.5X.
Key risks
Spike in crude oil prices, higher subsidy burden, lower production.
INVESTMENT LIST MEMBERSHIP
Asia Pacific Buy List
Asia Pacific Conviction Buy List
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