ONGC - Vietnam and Venezuela assets to drive OVL growth; company update; Buy :: Edelweiss

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ONGC (ONGC IN, INR 255, Buy)

We have incorporated OVL’s H1FY12 production numbers and financials. Key changes have been reduction in Imperial Energy’s output scale up and higher production declines in Syrian and Sudanese fields. Despite a fall in production, H1FY12 revenues were marginally ahead of estimates, led by higher crude realizations (42% YoY) and lower royalty costs. However, we expect H2FY12 earnings to be lower due to production declines in Sudan and Syria. On our revised estimates, OVL contributes 24% to FY12E consol EBITDA on a capital base that is 25% of consol capital invested. OVL now contributes INR42/share to ONGC’s SOTP of INR379, up from INR35/share earlier, primarily led by lower royalty costs. OVL’s CROCI is expected to stabilize ~17% and our OVL valuation implies ~1.1x EV/IC and FY13 P/E of ~7.0x.

OVL performance a mixed bag; Imperial yet to scale up

During FY11, OVL had relinquished 8 blocks. Proportion of producing blocks has increased to 29%. FY11 1P RRR was at 284% while 2P RRR was 578%. FY11 production stood at 9.448 mmtoe (up 6.5% YoY). Key positive surprises: 14% increase in Vietnam production, lower costs and lower output fall in Sakhalin. Key negative surprises: Imperial output growth remains meager even as it reports a negative EBITDA, 15% plus production fall in GNOP Sudan, absence of output hike in 5A block (Sudan) and lower-than-expected production in BC-10. Key forward triggers: Start of Myanmar and Carabobo blocks in 2013 (positive), production risks in Sudan (negative).

Valuations: OVL value at INR 42/sh; adds INR 5.5 to consol FY12 EPS

After changes, OVL now contributes INR5.5 to ONGC cons. FY12 EPS of INR29.6. Incorporating lower production from Sudan and Syria and a slower ramp-up from Imperial Energy, OVL now contributes INR42 to ONGC’s SOTP of INR379. OVL’s CROCI is expected to stabilize at ~17% and our estimated value for OVL implies ~1.1x EV/IC and FY13e P/E of ~7.0x. At INR255, ONGC trades at 8.6x FY12E P/E and 3.9x FY12E EV/EBITDA. Maintain ‘BUY/Sector Outperformer’.