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The positive contribution from the Rajasthan block (post resolution of the royalty dispute) as well
as from the full benefit of rising oil prices for overseas assets outweigh the uncertainty about (and
our more negative view on) upstream subsidy sharing. We maintain our Buy rating and Rs325
target price.
Cautious view on subsidy sharing
We model our subsidy payments by assuming that upstream companies will not benefit from the
government duty cuts. We derive our subsidy sharing ratios (35-40%) by assuming some
improvement in net oil realisation. In FY12, the upstream subsidy works out to 49% of reported
under-recovery. Our guiding principle is that there are no prospects for any sharp improvement in
net realisations as long as the government has to bear some burden from the downstream underrecoveries.
Oil price leverage for Rajasthan and OVL production
We believe the impact of making royalty costs recoverable in the Rajasthan block (joint venture
with Cairn India) will be very significant for ONGC’s financials. We estimate that ONGC revenue
entitlement from this block will rise sharply from US$341m in 1QFY12 to US$860m in 2QFY12.
The quarterly results of ONGC Videsh (OVL) also now clearly show how its earnings are
positively leveraged to rising global crude oil prices.
Upside if oil production growth is delivered
Despite rising reserve replacement ratios based on 3P reserves, ONGC has been unable to grow
its oil production and has historically missed its production guidance. Our forecasts assume tepid
growth in own domestic oil production, from 24.42mmt in FY11 to 25mmt in FY14. ONGC’s new
CEO has stated that own oil production will rise to 28mt in FY14. This target if achieved could
provide 18% upside to our FY14 EPS estimate.
Maintain Buy, TP Rs325
We raise our EPS forecasts by 4% for FY12-13. Our assumption for royalty cost recoverability
more than compensates for our new more-negative assumptions on subsidy payments. We
maintain our Rs325 target price and our Buy rating.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
The positive contribution from the Rajasthan block (post resolution of the royalty dispute) as well
as from the full benefit of rising oil prices for overseas assets outweigh the uncertainty about (and
our more negative view on) upstream subsidy sharing. We maintain our Buy rating and Rs325
target price.
Cautious view on subsidy sharing
We model our subsidy payments by assuming that upstream companies will not benefit from the
government duty cuts. We derive our subsidy sharing ratios (35-40%) by assuming some
improvement in net oil realisation. In FY12, the upstream subsidy works out to 49% of reported
under-recovery. Our guiding principle is that there are no prospects for any sharp improvement in
net realisations as long as the government has to bear some burden from the downstream underrecoveries.
Oil price leverage for Rajasthan and OVL production
We believe the impact of making royalty costs recoverable in the Rajasthan block (joint venture
with Cairn India) will be very significant for ONGC’s financials. We estimate that ONGC revenue
entitlement from this block will rise sharply from US$341m in 1QFY12 to US$860m in 2QFY12.
The quarterly results of ONGC Videsh (OVL) also now clearly show how its earnings are
positively leveraged to rising global crude oil prices.
Upside if oil production growth is delivered
Despite rising reserve replacement ratios based on 3P reserves, ONGC has been unable to grow
its oil production and has historically missed its production guidance. Our forecasts assume tepid
growth in own domestic oil production, from 24.42mmt in FY11 to 25mmt in FY14. ONGC’s new
CEO has stated that own oil production will rise to 28mt in FY14. This target if achieved could
provide 18% upside to our FY14 EPS estimate.
Maintain Buy, TP Rs325
We raise our EPS forecasts by 4% for FY12-13. Our assumption for royalty cost recoverability
more than compensates for our new more-negative assumptions on subsidy payments. We
maintain our Rs325 target price and our Buy rating.
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