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In Q3FY12, Oil and Natural Gas Corporation (ONGC.IN) (ONGC.BO) results were below our
estimates both on the top line as well as bottom line front on account of higher than expected
subsidy burden for the company.
Increase in subsidy drags the profit down but Cairn India's royalty adjustment saves
the day...
ONGC revenue declined 11% Y-o-Y and 19.2% sequentially to Rs.185.2 bn while PAT declined
4.8% Y-o-Y and 22% sequentially to Rs.67.4 bn. The company's adjusted PAT declined 33%
Y-o-Y and 45% sequentially to Rs.47.5 bn. Revenue and PAT were below our estimates on
account of higher than expected subsidy burden. ONGC subsidy burden increased 197% Y-o-
Y and 119% sequentially to Rs. 125.3 bn on account of increase in the subsidy sharing of
upstream oil companies.
Oil and gas production to increase on account of IOR/EOR projects, marginal field
development and ramp up in Rajasthan field production...
In Q3 FY12, ONGC's crude output declined 4.1% Y-o-Y and 1.4% sequentially to 6.74 mmt
which was marginally lower than our assumption while gas production increased 0.8% Y-o-Y
and 0.3% sequentially to 6.4 bcm which was in line with our estimates. We expect ONGC
crude oil and gas production to increase on account of increase in production at the Rajasthan
field coupled with increase in production at the marginal fields and IOR/EOR projects which
will more than compensate for the natural decline in nomination fields. It should be noted that
the company target to produce 28.76 mmt (domestic: 25.04 mmt and JV: 3.72 bcm) of oil and
27.02 bcm (domestic: 24.87mmt and JV: 2.14 bcm) of gas in FY13. The company expects oil
production to increase from 24.4 mn tonnes in FY11 to 27-28 mn tonnes in FY14.
Production hiccups at OVL but high crude oil prices for rescue...
We cut down production estimates at OVL to 8.8 mmtoe and 8.7 mmtoe for FY12E and FY13E
respectively in line with the company's target on account of decline in production at blocks in
Syria and Sudan. However, we note that, OVL's crude oil realization exhibits direct correlation
with Brent crude oil prices. For the last three years, OVL's crude oil realization stood at around
10% discount to the Brent crude oil prices.
Uncertainty over Subsidy mechanism will remain a drag…
For 9M FY12, the share of subsidy of upstream oil companies increased to 37.9% as against
33.3% in HF1Y12 and 38.8% in FY11. The uncertainty over the subsidy sharing mechanism
will continue to be a drag on the stock. We increase subsidy burden to Rs. 1,362 bn and Rs.988
bn, as against the earlier estimates of Rs. 1,168 bn and Rs. 820 bn for FY12E and FY13E
respectively, to factor in higher than expected crude oil prices and depreciation in the rupee
vis-à-vis dollar. We increase the subsidy share of upstream companies to 40% on account of a
weaker fiscal position of the government.
Valuation
We revise EPS estimates to Rs. 29.5 and Rs. 32.6 as against the earlier estimates of Rs. 31.6 and
34.0 for FY12E and FY13E respectively to account for increase in the gross under recoveries of
OMCs, change in subsidy sharing mechanism and a lower production volume at OVL. At
CMP, ONGC is trading at 9.5x FY12Eand 8.6x FY13E EPS of Rs. 29.5 and Rs. 32.6 respectively
and at an EV/EBIDTA of 4.0x FY12E and 3.4x FY13E. We value ONGC standalone business at
Rs.263 per share at a EV/ EBIDTA of multiple 4x and OVL at Rs.48 per share at EV/ boe of $5
per bbl for its 2P reserves. We value investments at Rs 17 per share, a 20% discount to the
market value. We maintain buy rating on the stock and based on sum-of-parts valuation (SOTP),
we arrive at a revised fair value of Rs.328 (earlier target price of Rs. 331 per share), implying a
16.4% upside from the current levels and a 30% upside from our initiating price of Rs. 252 per
share.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
In Q3FY12, Oil and Natural Gas Corporation (ONGC.IN) (ONGC.BO) results were below our
estimates both on the top line as well as bottom line front on account of higher than expected
subsidy burden for the company.
Increase in subsidy drags the profit down but Cairn India's royalty adjustment saves
the day...
ONGC revenue declined 11% Y-o-Y and 19.2% sequentially to Rs.185.2 bn while PAT declined
4.8% Y-o-Y and 22% sequentially to Rs.67.4 bn. The company's adjusted PAT declined 33%
Y-o-Y and 45% sequentially to Rs.47.5 bn. Revenue and PAT were below our estimates on
account of higher than expected subsidy burden. ONGC subsidy burden increased 197% Y-o-
Y and 119% sequentially to Rs. 125.3 bn on account of increase in the subsidy sharing of
upstream oil companies.
Oil and gas production to increase on account of IOR/EOR projects, marginal field
development and ramp up in Rajasthan field production...
In Q3 FY12, ONGC's crude output declined 4.1% Y-o-Y and 1.4% sequentially to 6.74 mmt
which was marginally lower than our assumption while gas production increased 0.8% Y-o-Y
and 0.3% sequentially to 6.4 bcm which was in line with our estimates. We expect ONGC
crude oil and gas production to increase on account of increase in production at the Rajasthan
field coupled with increase in production at the marginal fields and IOR/EOR projects which
will more than compensate for the natural decline in nomination fields. It should be noted that
the company target to produce 28.76 mmt (domestic: 25.04 mmt and JV: 3.72 bcm) of oil and
27.02 bcm (domestic: 24.87mmt and JV: 2.14 bcm) of gas in FY13. The company expects oil
production to increase from 24.4 mn tonnes in FY11 to 27-28 mn tonnes in FY14.
Production hiccups at OVL but high crude oil prices for rescue...
We cut down production estimates at OVL to 8.8 mmtoe and 8.7 mmtoe for FY12E and FY13E
respectively in line with the company's target on account of decline in production at blocks in
Syria and Sudan. However, we note that, OVL's crude oil realization exhibits direct correlation
with Brent crude oil prices. For the last three years, OVL's crude oil realization stood at around
10% discount to the Brent crude oil prices.
Uncertainty over Subsidy mechanism will remain a drag…
For 9M FY12, the share of subsidy of upstream oil companies increased to 37.9% as against
33.3% in HF1Y12 and 38.8% in FY11. The uncertainty over the subsidy sharing mechanism
will continue to be a drag on the stock. We increase subsidy burden to Rs. 1,362 bn and Rs.988
bn, as against the earlier estimates of Rs. 1,168 bn and Rs. 820 bn for FY12E and FY13E
respectively, to factor in higher than expected crude oil prices and depreciation in the rupee
vis-à-vis dollar. We increase the subsidy share of upstream companies to 40% on account of a
weaker fiscal position of the government.
Valuation
We revise EPS estimates to Rs. 29.5 and Rs. 32.6 as against the earlier estimates of Rs. 31.6 and
34.0 for FY12E and FY13E respectively to account for increase in the gross under recoveries of
OMCs, change in subsidy sharing mechanism and a lower production volume at OVL. At
CMP, ONGC is trading at 9.5x FY12Eand 8.6x FY13E EPS of Rs. 29.5 and Rs. 32.6 respectively
and at an EV/EBIDTA of 4.0x FY12E and 3.4x FY13E. We value ONGC standalone business at
Rs.263 per share at a EV/ EBIDTA of multiple 4x and OVL at Rs.48 per share at EV/ boe of $5
per bbl for its 2P reserves. We value investments at Rs 17 per share, a 20% discount to the
market value. We maintain buy rating on the stock and based on sum-of-parts valuation (SOTP),
we arrive at a revised fair value of Rs.328 (earlier target price of Rs. 331 per share), implying a
16.4% upside from the current levels and a 30% upside from our initiating price of Rs. 252 per
share.
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