ONGC (2QFY15) : Clarity on subsidy sharing is key. Maintain BUY :: HDFC Sec, link

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Clarity on subsidy sharing is key
ONGC reported EBITDA of Rs 109.4bn (-10% YoY) led
by lower net oil realisation (-10% YoY). Impact of
higher oil volumes were negated by decline in gas
volumes. Lower exploration write-off of dry wells and
lower tax rate led to a PAT of Rs 54.5bn (-10%).
Fall in crude prices and diesel de-control has led to
reduction in total oil under recovery to Rs 511bn (-
16% YoY) in 1HFY15. However, ONGC’s contribution
has increased to Rs 268bn (+2%). We believe the govt
would keep maximum benefits of declining UR.
However, this anomaly will be removed and part
benefits will be passed on to upstream players to
boost domestic production. We are confident that
the govt will focus on stable policy regime and there
will be a subsidy sharing mechanism soon.
Increase in production and fall in UR sharing will be
the key triggers for ONGC. We have reduced our
estimate factoring lower crude/gas prices. Our revised
SOTP target for ONGC is Rs 425/sh (11x FY16E standalone
+ OVL EPS and Rs 22/sh from investments). Maintain BUY.
ONGC to benefit from falling oil under recovery
 We expect oil UR to decline to Rs 0.8/0.7tn in FY15/16
from Rs 1.4tn in FY14 led by lower crude prices/diesel
de-control. We expect that the government’s subsidy
will reduce to ~Rs 350bn (-50% YoY) and ONGC’s net oil
realisation will rise from $ 41/bbl to $ 48/55 in
FY15/16.
 Our base case assumption for crude is $ 95/bbl for
FY16. Please refer page-2 for detailed sensitivity of
FY16E EPS with crude price, INR-$ and ONGC’s net
realisation.
2QFY15 highlights
 Net oil realisation (post subsidy sharing) was $ 41.4/bbl
(-8/-12% YoY/QoQ). In INR terms it was Rs 2,505/bbl (-
10% YoY, -11% QoQ).
 Subsidy sharing for the quarter was $ 60.8/bbl (-5/-3%
YoY/QoQ). Subsidy was Rs 136 bn (-1% YoY, +3% QoQ).
 Stand oil sales vol were 6.0 mmt (+4/+2% YoY/QoQ).
Gas sales volumes were 4.3 BCM (-11/-8% YoY/QoQ).
 OVL : Oil volumes were 1.3 mmt (-4% YoY) and gas
volumes were 0.69 BCM (+15% YoY)

LINK
http://www.hdfcsec.com/Share-Market-Research/Research-Details/StockReports/3009832