ONGC gets higher gas prices, but likely from FY15 :: Credit Suisse

● CNBC suggests the CCEA have accepted the recommendation of
the Rangarajan committee to increase gas prices in India with
quarterly reviews. Prices are estimated to increase from $4.2/mmbtu
to $8.4/mmbtu by April 2014 when the increase is effective.
● It seems ONGC will realise higher prices only in FY15 and not
immediately. At $7.5/mmbtu for the year, ONGC’s FY15E EBITDA
can benefit by Rs120 bn (USD/INR: 58.9) due to the increase.
● If FY15E under-recoveries moderate (continued diesel price hikes,
modest currency/commodity moves), and ONGC delivers the
promised volumes growth, then the company can witness strong
EBITDA growth despite high subsidy payments. Assuming ONGC
pays Rs680 bn in FY15, EBITDA could still grow 16% over FY13E.
● FY14E EBTIDA may benefit from a weaker INR and improved
subsidiary performance, but is at risk to increased subsidies. We
update FY14/15E EPS +4/2% and TP from Rs339 to Rs345. Until
government policy on subsidies (and how they treat the large
gains at ONGC) become clear, FY15 growth may not be fully
priced in. Maintain NEUTRAL rating.

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Gas prices increased, but with a catch
Media reports suggest the Cabinet Committee on Economic Affairs
has accepted the recommendation of the Rangarajan committee to
increase gas prices in India. These will now be based on a formula
linked to several global benchmarks, and will be reviewed quarterly.
Reports by media (e.g., CNBC) suggest prices can increase from the
current US$4.2/mmbtu to US$8.4/mmbtu next year, though the
outcome will depend on global trends.
This gas price increase has been expected for some time. It seems
however that APM gas prices will not increase immediately, but from 1
April 2014, along with the increase for KG D6 production. This pushes
out the large potential EBITDA driver for ONGC by another year, and
creates an interesting dynamic (at least for analyst models).
FY14 at mercy of subsidy policy
Without the gas price increase, FY14E EBITDA for ONGC will largely
depend on the amount of subsidy it is asked to pay. While we expect
some stabilisation (and growth) in domestic volumes for the year, the
near-term data is not supportive. Subsidiary performance can improve at
OVL (through the ACG acquisition, and growth elsewhere) and at MRPL
(through the reversal of the loss in FY13). If however, the government
asks ONGC to pay c.Rs550 bn in subsidies (on a flat USD/bbl YoY)—to
compensate for the unexpected increase in under-recovery forecast for
the year, then the total EBITDA may remain within 10% of FY13 delivered.
FY15 may do very well—at least on paper
We expect ONGC’s domestic oil production to increase from 22.6MT in
FY13 to 25.2MT in FY15. Gas output can similarly increase from 23.6
bcm to 26.3 bcm over the same period. Production at OVL can also
grow by FY15 (1.9mmt oil, 0.6 bcm gas). If commodity/currency stabilise
and the government continues its programme of increasing retail diesel
prices, under-recoveries in FY15 are also likely to be relatively modest.
ONGC may not be required to pay large amount of subsidy.
Even if we assume ONGC pays Rs680 bn in subsidy in FY15,
volumes (and a weaker INR) can drive EBITDA up 16% over CS
FY14E; on these numbers, ONGC currently trades at 3.9x on
EV/EBITDA; at a 22% discount to our basket of global E&P, and at a
10% premium to CNOOC.

Risks related to government action
There is risk the government finds ways to ‘mop up’ the large, unaskedfor
gains from ONGC—as the gas price increases will hurt its finances.
Until government policy on subsidies become clear, we suspect FY15
growth may not be fully priced in. We update our model for higher gas
prices in FY15 and increase subsidy payment estimates for FY14/15 to
Rs550/680 bn respectively. Our FY14/15E EPS increase 4%/2% each.
TP increases from Rs339 to Rs345. Maintain NEUTRAL.