ONGC- Neutral- In line with expectations: Goldman Sachs

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EARNINGS REVIEW
Oil & Natural Gas Corp. (ONGC.BO)
Neutral
In line with expectations: Higher net realisation; recouped costs rise
What surprised us
ONGC reported 2QFY11 adjusted net profit of Rs50 bn (flat yoy) vs. our
estimate of Rs58 bn. However, adjusted for an expected one-time gain of
Rs10 bn that did not come through in the quarter as clarification on the
matter from the government is still pending, ONGC’s 2Q profit was in line
with our estimates. Higher 2Q net oil realizations at US$62.8/bbl (vs. our
US$59/bbl estimate) were offset by lower-than-expected volumes. ONGC’s
standalone oil volumes fell 2% yoy but overall oil volume was up 3% yoy
from its share in Rajasthan production, which more than offset the impact of
an unplanned shutdown in Panna Mukta fields. ONGC’s gas volumes also
fell 3% yoy from this shutdown. Recouped costs rose 86% yoy (on account
of high dry well expense of Rs24.4 bn vs. Rs6.5 bn in 2QFY10). This eroded
the 25.5% yoy EBITDA gains from the 11% yoy rise in net oil realizations and
higher yoy gas price, leaving recurring profit flat yoy. 2Q cash profit was
also flat yoy.
What to do with the stock
Going forward, we believe that state-owned upstream companies remain
the better way to take exposure to any regulatory tailwind on fuel pricing,
although a part of the upside is already in ONGC’s stock price, in our view.
With ONGC’s legacy fields facing natural decline, profitable deployment of
cash in overseas asset acquisitions could provide the next leg of growth
for ONGC, in our view. We remain Neutral on ONGC with an EV/GCI vs.
CROCI/WACC framework-based 12-m TP of Rs1410, implying upside of 8%.
Key risks:
1) policy action on fuel pricing;
 2) high subsidy from rising oil prices; and
3) lower-than-expected production from legacy E&P fields.