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Oil & Natural Gas Corporation (ONGC)
Energy
All is well abroad, not so well in India. We take comfort from OVL’s reported
EBITDA of `64.1 bn (+59.4% yoy) and net income of `27.2 bn (+263% yoy) in 1HFY12.
We expect OVL’s profitability to improve in 2HFY12E given (1) likely weaker Rupee and
(2) higher oil and gas production. We reiterate our BUY rating on ONGC stock given
(1) attractive valuations at 7.6X FY2012E EPS and (2) 35% potential upside to our
12-month target price of `355 based on 9X FY2013E estimates.
OVL’s results boosted by higher crude oil prices
OVL reported 1HFY12 net income of `27.2 bn (EPS of `3.2/share attributed to ONGC) versus `7.5
bn in 1HFY11 (see Exhibit 1). The company reported sharp yoy increase in EBITDA to `64.1 bn
versus `40.2 bn in 1HFY11 despite stable oil and gas production at 4.4 mn toe, led by sharply
higher crude oil prices (+US$39/bbl yoy). Our estimate of 2HFY12E EPS for OVL at `4 should be
achievable given (1) weaker exchange rate assumption of `49.3/US$ versus `45.3/US$ in 1HFY12
and (2) higher oil and gas production at 4.8 mn toe in 2HFY12E versus 4.4 mn toe in 1HFY12.
ONGC’s consolidated EPS of `34.4 is achievable
We estimate ONGC’s standalone FY2012E EPS (adjusted) at `27/share versus `20/share in FY2011.
The yoy increase reflects (1) weaker Rupee (`3), (2) cost-recoverability of royalty for Rajasthan
block (`2), (3) higher production from Rajasthan block (`1.5), (4) higher realization for JV oil (`1)
and (5) higher gas price for full year (`1). This is partially offset by lower net realization for crude
oil produced from ONGC’s fields (–`2.5/share). We estimate OVL to contribute `7.2 to ONGC’s
FY2012E consolidated EPS assuming (1) stable oil and gas production at 9.2 mn tons (+0.2% yoy),
(2) US$110/bbl crude oil price and (3) Rupee-Dollar exchange rate of `47.3/US$.
Assume 45% subsidy burden on upstream companies in FY2012E
We have assumed upstream companies to bear 45% of gross under-recoveries in FY2012E and
40% in FY2013-14E. We note that the share of upstream companies was 33.3% in 1HFY12.
However, we admit that there is no clarity on the share of upstream companies for FY2012E and
expect the Government to increase the subsidy burden on upstream companies in 2HFY12E given
its fiscal constraints.
Stock discounting a fairly bleak scenario for net crude price realization for ONGC
We believe ONGC stock price is discounting a bleak scenario in terms of subsidy burden to be
borne by upstream companies. Our reverse computation exercise reflects the stock is discounting
net crude oil price realization at US$45/bbl, which is significantly lower versus US$53.8/bbl in
FY2011 and US$55.9/bbl in FY2010. For the purpose of this exercise, we assume (1) crude oil
(Dated Brent) price assumption of US$90/bbl and (2) exchange rate assumption of `49/US$.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Oil & Natural Gas Corporation (ONGC)
Energy
All is well abroad, not so well in India. We take comfort from OVL’s reported
EBITDA of `64.1 bn (+59.4% yoy) and net income of `27.2 bn (+263% yoy) in 1HFY12.
We expect OVL’s profitability to improve in 2HFY12E given (1) likely weaker Rupee and
(2) higher oil and gas production. We reiterate our BUY rating on ONGC stock given
(1) attractive valuations at 7.6X FY2012E EPS and (2) 35% potential upside to our
12-month target price of `355 based on 9X FY2013E estimates.
OVL’s results boosted by higher crude oil prices
OVL reported 1HFY12 net income of `27.2 bn (EPS of `3.2/share attributed to ONGC) versus `7.5
bn in 1HFY11 (see Exhibit 1). The company reported sharp yoy increase in EBITDA to `64.1 bn
versus `40.2 bn in 1HFY11 despite stable oil and gas production at 4.4 mn toe, led by sharply
higher crude oil prices (+US$39/bbl yoy). Our estimate of 2HFY12E EPS for OVL at `4 should be
achievable given (1) weaker exchange rate assumption of `49.3/US$ versus `45.3/US$ in 1HFY12
and (2) higher oil and gas production at 4.8 mn toe in 2HFY12E versus 4.4 mn toe in 1HFY12.
ONGC’s consolidated EPS of `34.4 is achievable
We estimate ONGC’s standalone FY2012E EPS (adjusted) at `27/share versus `20/share in FY2011.
The yoy increase reflects (1) weaker Rupee (`3), (2) cost-recoverability of royalty for Rajasthan
block (`2), (3) higher production from Rajasthan block (`1.5), (4) higher realization for JV oil (`1)
and (5) higher gas price for full year (`1). This is partially offset by lower net realization for crude
oil produced from ONGC’s fields (–`2.5/share). We estimate OVL to contribute `7.2 to ONGC’s
FY2012E consolidated EPS assuming (1) stable oil and gas production at 9.2 mn tons (+0.2% yoy),
(2) US$110/bbl crude oil price and (3) Rupee-Dollar exchange rate of `47.3/US$.
Assume 45% subsidy burden on upstream companies in FY2012E
We have assumed upstream companies to bear 45% of gross under-recoveries in FY2012E and
40% in FY2013-14E. We note that the share of upstream companies was 33.3% in 1HFY12.
However, we admit that there is no clarity on the share of upstream companies for FY2012E and
expect the Government to increase the subsidy burden on upstream companies in 2HFY12E given
its fiscal constraints.
Stock discounting a fairly bleak scenario for net crude price realization for ONGC
We believe ONGC stock price is discounting a bleak scenario in terms of subsidy burden to be
borne by upstream companies. Our reverse computation exercise reflects the stock is discounting
net crude oil price realization at US$45/bbl, which is significantly lower versus US$53.8/bbl in
FY2011 and US$55.9/bbl in FY2010. For the purpose of this exercise, we assume (1) crude oil
(Dated Brent) price assumption of US$90/bbl and (2) exchange rate assumption of `49/US$.
I think that would be on this situation.
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