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India Equity Research Reports, IPO and Stock News
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Consensus estimates ONGC’s FY12E EBITDA will grow 7% YoY
on assumptions that net realisations remain c.US$55/bbl,
Rajasthan becomes profitable and OVL benefits from higher oil
prices. ONGC then trades at 3.5x EV/EBITDA FY12E. While
inexpensive on headline, this is when E&P comps have fallen
from 6.5x in 1Q CY11 to 4.5x now. ONGC might therefore be a
play on global commodity multiples.
● ONGC should see improving volume momentum. Ex JVs (Cairn),
we expect domestic oil production to grow from 24 MTPA in FY11
to 30 MTPA by FY15. The gas output can similarly grow from 23
BCM/year in FY11 to 27 BCM/year by FY15. Despite cost
pressures, this should be a significant positive for the stock.
● Uncertain subsidy payments remain a large dampener. Scenarios
that argue for downside to potential FPO prices seem extreme –
FY13E EBITDA would be lower than FY11 if oil prices remained
higher than US$110/bbl and upstream paid 55% or more of total
under-recoveries – but may remain an overhang until year-end.
While our target price indicates 29% potential upside; the large
stock sale and policy uncertainty may remain a near-term overhang.
With ONGC’s FPO around the corner, we highlight the key issues and
investment arguments in relation to the company in this note.
Consensus sees 7% YoY EBITDA growth on specifics
Consensus numbers expect ONGC’s FY12 EBITDA to grow 7% YoY,
on (1) an assumption that net realisations (post subsidy net backs)
remain close to US$55/bbl, we think (FY11A of US$54/bbl), (2) higher
oil prices help OVL (the overseas business) earnings, and (3) higher
earnings from ONGC’s share at Cairn’s Rajasthan fields (with a oneoff
reversal of historical royalties in 3Q/4Q FY12).
On consensus numbers, ONGC is not expensive
ONGC trades at 3.5x FY12E consensus — appears inexpensive on
headline, and relative to its own history. These multiples, however,
must be seen in the context of significant corrections in global E&P
multiples, which grew from 6.5x in 1Q CY11 to 4.5x now. ONGC’s
multiple discount to global comps has remained stable.
ONGC – a play on global commodity multiples?
To that extent, ONGC might be a trade on global E&P (commodity)
multiples/confidence. That said, regional E&P stocks — without
government intervention — might be better plays. An increase in E&P
comps may be accompanied by the increasing interest in Indian
stocks per se (increasing ‘risk’ trades). ONGC may not outperform as
much as expected.
Operationally, ONGC is in a good place
We expect ONGC’s domestic oil production (ex Cairn and JVs) to
grow from 24 MTPA in FY11 to 30 MTPA by FY15. The gas output
can similarly grow from 23 BCM/year in FY11 to 27 BCM/year by
FY15. While this depends on ONGC’s projects delivering as per
expectations, on time but may still be at risk, volume momentum
should improve, ideally having a positive impact on earnings.
This is countered by increasing cost pressure — from higher
production costs (inflation) and continued high exploration costs. We
count c.85 deep water wells that ONGC has committed for its NELP
acreage which by themselves could entail a capex of c.US$5-6 bn.
Finally – on subsidies
ONGC’s subsidy payments remain uncertain. Our note, Wait for policy
clarity, 4 July 2011, contains EBITDA sensitivities to subsidy
payments where we highlight that FY13E EBITDA would be lower
than FY11 if oil prices remained higher than US$110/bbl and
upstream paid 55% or more of total under-recoveries. These are the
assumptions that seem harsh relative to history (a 33-39% upstream
share), but may have the disproportionate probability in times of
government’s fiscal stress.
If the government sells the stock at a discount, scenarios that argue
for further downside may seem even more extreme. Given the subsidy
question may not be answered until April 2012, it may be reasonable
to assume ONGC EBITDA remains range-bound or has some limited
upside — as a top-down estimate. The FPO may therefore be more
attractive for the low multiples and any discount that the government
may offer. Without clarity on subsidies and policy, however, any
relative multiple expansion (to other E&P, India) may be limited.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Consensus estimates ONGC’s FY12E EBITDA will grow 7% YoY
on assumptions that net realisations remain c.US$55/bbl,
Rajasthan becomes profitable and OVL benefits from higher oil
prices. ONGC then trades at 3.5x EV/EBITDA FY12E. While
inexpensive on headline, this is when E&P comps have fallen
from 6.5x in 1Q CY11 to 4.5x now. ONGC might therefore be a
play on global commodity multiples.
● ONGC should see improving volume momentum. Ex JVs (Cairn),
we expect domestic oil production to grow from 24 MTPA in FY11
to 30 MTPA by FY15. The gas output can similarly grow from 23
BCM/year in FY11 to 27 BCM/year by FY15. Despite cost
pressures, this should be a significant positive for the stock.
● Uncertain subsidy payments remain a large dampener. Scenarios
that argue for downside to potential FPO prices seem extreme –
FY13E EBITDA would be lower than FY11 if oil prices remained
higher than US$110/bbl and upstream paid 55% or more of total
under-recoveries – but may remain an overhang until year-end.
While our target price indicates 29% potential upside; the large
stock sale and policy uncertainty may remain a near-term overhang.
With ONGC’s FPO around the corner, we highlight the key issues and
investment arguments in relation to the company in this note.
Consensus sees 7% YoY EBITDA growth on specifics
Consensus numbers expect ONGC’s FY12 EBITDA to grow 7% YoY,
on (1) an assumption that net realisations (post subsidy net backs)
remain close to US$55/bbl, we think (FY11A of US$54/bbl), (2) higher
oil prices help OVL (the overseas business) earnings, and (3) higher
earnings from ONGC’s share at Cairn’s Rajasthan fields (with a oneoff
reversal of historical royalties in 3Q/4Q FY12).
On consensus numbers, ONGC is not expensive
ONGC trades at 3.5x FY12E consensus — appears inexpensive on
headline, and relative to its own history. These multiples, however,
must be seen in the context of significant corrections in global E&P
multiples, which grew from 6.5x in 1Q CY11 to 4.5x now. ONGC’s
multiple discount to global comps has remained stable.
ONGC – a play on global commodity multiples?
To that extent, ONGC might be a trade on global E&P (commodity)
multiples/confidence. That said, regional E&P stocks — without
government intervention — might be better plays. An increase in E&P
comps may be accompanied by the increasing interest in Indian
stocks per se (increasing ‘risk’ trades). ONGC may not outperform as
much as expected.
Operationally, ONGC is in a good place
We expect ONGC’s domestic oil production (ex Cairn and JVs) to
grow from 24 MTPA in FY11 to 30 MTPA by FY15. The gas output
can similarly grow from 23 BCM/year in FY11 to 27 BCM/year by
FY15. While this depends on ONGC’s projects delivering as per
expectations, on time but may still be at risk, volume momentum
should improve, ideally having a positive impact on earnings.
This is countered by increasing cost pressure — from higher
production costs (inflation) and continued high exploration costs. We
count c.85 deep water wells that ONGC has committed for its NELP
acreage which by themselves could entail a capex of c.US$5-6 bn.
Finally – on subsidies
ONGC’s subsidy payments remain uncertain. Our note, Wait for policy
clarity, 4 July 2011, contains EBITDA sensitivities to subsidy
payments where we highlight that FY13E EBITDA would be lower
than FY11 if oil prices remained higher than US$110/bbl and
upstream paid 55% or more of total under-recoveries. These are the
assumptions that seem harsh relative to history (a 33-39% upstream
share), but may have the disproportionate probability in times of
government’s fiscal stress.
If the government sells the stock at a discount, scenarios that argue
for further downside may seem even more extreme. Given the subsidy
question may not be answered until April 2012, it may be reasonable
to assume ONGC EBITDA remains range-bound or has some limited
upside — as a top-down estimate. The FPO may therefore be more
attractive for the low multiples and any discount that the government
may offer. Without clarity on subsidies and policy, however, any
relative multiple expansion (to other E&P, India) may be limited.
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