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Oil & Natural Gas Corp (ONGC IN), Rs1320.50, Hold) – News flow on oil/gas
We assume that ONGC is being reimbursed royalties to the extent of 70% on the Rajasthan block
(resultant IRR 40%). GOI considering giving ONGC a return of 10-15% is hence negative. Also
hike in gas prices for non-priority customers will flow to gas pool and ONGC will benefit only when
the pool funds are disbursed.
Rajasthan block royalty issue
Today's Economic Times has reported that the Indian government (GOI) is considering ways
to give ONGC a return of 10-15% on its investment in the Rajasthan block.
Though ONGC owns a 30% stake in the Rajasthan joint venture (JV) with Cairn India (which
owns balance 70%), it is currently obliged to bear 100% of the royalty (non-cost recoverable),
which is 20% of the wellhead oil price. We estimate that over the life of the field, ONGC's
royalty payments will aggregate to US$3.9bn if it has to pay only its share of 30%, or
US$13.1bn if the entire 100% share has to be paid. Thus, if 100% of the royalty is payable,
ONGC's net present value (NPV) from this block would be negative.
We have already taken a view that the above outcome is unlikely and, in our model, have
assumed that GOI will reimburse ONGC for the royalty ONGC pays on behalf of Cairn. On
this assumption, the IRR on Rajasthan block for ONGC works out close to 40% (assuming
Brent averages at US$78/bbl in FY11, US$84/bbl in FY12 and US$88/bbl thereafter).
Thus, if GOI is indeed looking to ensure that ONGC returns from the block are in the 10-15%
range, this outcome would be negative relative to our existing assumption.
In any case, we would expect this issue to be settled before March 2011 as it is closely
connected to the clearance for the Vedanta acquisition of Cairn India and GOI's divestment in
ONGC.
Gas price hike for non-priority customers
Newspapers earlier this month had carried stories stating that effective from 1 December
2010, GOI had allowed ONGC/OIL to hike prices of gas supplied to non-priority customers (7-
8mmscmd) by 10% to US$5.25/mmbtu.
This news is not entirely accurate. While the gas price has been hiked, the higher revenues
will currently flow to the gas pool. It is only at the end of the year that surpluses in the gas
pool would be disbursed to ONGC/OIL.
News on special dividend
On 3 December 2010, the Economic Times reported that ONGC may pay a first-ever special
dividend prior to the GOI divestment planned for March 2011. We believe that such a
development would be negative as the ONGC's cash surplus is meant for acquisitions of
oil/gas assets.
ONGC paid a dividend of Rs33/share (total outgo Rs69bn) in FY10 and we have been
forecasting a higher dividend of Rs40 (Rs82bn) in FY11. The free cash balance as on 31
March 2010 was Rs123bn so that theoretically, the special dividend could be equal to the
normal dividend.
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