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O NGC -Hope of more sops before FPO in 1Q 2011
Where we are
In 2010 ONGC gained from reforms, which increased the price of APM oil & gas
(ie, from nomination blocks). From June 2010 APM gas sold to priority sector was
hiked to US$4.2/mmbtu (up 113%) and that sold to other consumers (10-12% of
volumes) to US$5.25/mmbtu. Petrol price was deregulated, and prices of other
subsidized products were hiked by 5-32% in end-June. We estimate this will boost
ONGC’s oil price net of subsidy by US$12.5/bbl. ONGC’s reserve replacement
ratio is also over 1 in the past four years.
Where we are going
In end-June 2010 it was announced that further hike in diesel price would be
made later to deregulate the fuel. Diesel deregulation appears unlikely now given
the sharp rise in oil price. However, some hike in diesel price is not ruled out.
Rs2/ltr hike in diesel would boost ONGC’s FY12E EPS by Rs9 (6%). Government
plans to divest 5% stake in ONGC in 1Q 2011. There is hope of more sops before
the stake sale. ONGC is also expected to drill some of its most prospective
acreage in the next 12 months as its deep water rigs rise from three to five.
Investment conclusion for 2011
In FY11 ONGC gained from oil & gas price related reforms for part of the year. In
FY12E it will get full benefit of these reforms and any further reforms that may be
implemented. Before the stake sale, government may fulfill ONGC’s long-standing
demand of cutting royalty on Rajasthan oil, adding US$350-800mn (6-11%) to its
FY11-13 profit. Another demand that may be met is linking ONGC’s subsidy to its
gross oil price rather than bearing a proportion of the subsidy. ONGC’s share
price of Rs1,330 discounts long-term oil price net of subsidy of US$52/bbl vis-àvis
long-term net oil price of US$63-68/bbl expected by us. We retain Buy on
ONGC with a PO of Rs1,732 (30% potential upside on closing of 16 December).
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