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Abundant reserves
ONGC’s recent reserve release reconfirms the late-2010 independent audit that
assessed its proved reserves 10% lower than ONGC’s estimate due to differences
in Assam and Sakhalin-1. Concerns around its reserve base are exaggerated in our
view, though; notably the audits indicate that 2P/3P reserves are 2/23% higher
driven by upsides in Mumbai High crude. ONGC’s assets are mature and we do not
anticipate strong production growth to justify a secular investment theme.
Nonetheless, it will benefit from the inevitable policy interventions that could drive
earnings 10-20% higher; at <4x EV/Ebitda valuations are also supportive. O-PF.
Recent audit reconfirms late-2010 assertions. ONGC’s recent reserve release
indicates that an independent audit of most of its domestic and international assets by
D&M, GCA and Sproule shows that its 1P reserves may be 10% (646mboe) lower than
its own estimate of 6.5bn boe. This reconfirms the late-2010 audit which ONGC had
released in Feb-11. The downgrades stem mostly from Assam, Sakhalin-1 (512mboe).
Assam may remain a problem. D&M assesses ONGC’s 1P Assam reserves 26%
lower than ONGC’s estimate cutting 1P reserves by 142mboe. It takes cognizance of
the repeated delays in project implementation and the high R/P ratios to shift 1P
reserves to 3P. Indeed, ONGC’s Assam asset has been a perennial under-performer
over the last 15 years with production halving to 22kbpd now. Three IOR and renewal
projects worth US$1.2bn are slated for completion over FY12-17 which ONGC hopes
will revive output. We are less optimistic given the history of multi-year delays here.
Sakhalin-1 cuts well known. The 370mboe cut to Sakhalin-1 is due to different
standards (ONGC uses the Russian reserve system, D&M uses SPE), differing field lives
(D&M uses 2031 as end year based on the contract, ONGC’s estimate runs to 2054 by
building extensions) and disagreements on reserves upsides (due to lack of sales
agreements and evacuation infra, D&M does not consider future developments). The
differences have been highlighted by ONGC in its prior annual reports and by partner
Rosneft in its 2006 prospectus. In our view, most of the differences at Sakhalin-1 stem
from lower gas reserves; these are a negligible value driver for ONGC today.
2P/3P reserves are higher. Indeed even on D&M’s lower estimates, Assam and
Sakhalin-1 1P cover extends to a very comfortable 24-35 years with a ~15 year overall
reserve cover. Further, given the limited impact on 1P reserves, concerns around
ONGC’s reserve base are exaggerated in our view. Notably the audits indicate that
2P/3P reserves are 2/23% higher driven by upsides in Mumbai High crude where GCA
estimates that 1P/2P/3P reserves can be sharply (9/72/43%) higher than ONGC’s own
estimate; ONGC has only used estimates based on the current development plans
whereas GCA include longer term developments and future water injections as well.
Maintain O-PF. We expect ONGC to continue to invest heavily in Mumbai-High
redevelopments, therefore. Nonetheless, its assets are mature and we do not
anticipate production growth to justify a secular investment theme; indeed FY12 has
started badly start with crude output down 2.4%YoY in April-May and gas down 1.3%.
Nonetheless, we expect ONGC to benefit from the inevitable policy interventions that
could drive earnings 10-20% higher. At <4x EV/Ebitda valuations are also supportive.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Abundant reserves
ONGC’s recent reserve release reconfirms the late-2010 independent audit that
assessed its proved reserves 10% lower than ONGC’s estimate due to differences
in Assam and Sakhalin-1. Concerns around its reserve base are exaggerated in our
view, though; notably the audits indicate that 2P/3P reserves are 2/23% higher
driven by upsides in Mumbai High crude. ONGC’s assets are mature and we do not
anticipate strong production growth to justify a secular investment theme.
Nonetheless, it will benefit from the inevitable policy interventions that could drive
earnings 10-20% higher; at <4x EV/Ebitda valuations are also supportive. O-PF.
Recent audit reconfirms late-2010 assertions. ONGC’s recent reserve release
indicates that an independent audit of most of its domestic and international assets by
D&M, GCA and Sproule shows that its 1P reserves may be 10% (646mboe) lower than
its own estimate of 6.5bn boe. This reconfirms the late-2010 audit which ONGC had
released in Feb-11. The downgrades stem mostly from Assam, Sakhalin-1 (512mboe).
Assam may remain a problem. D&M assesses ONGC’s 1P Assam reserves 26%
lower than ONGC’s estimate cutting 1P reserves by 142mboe. It takes cognizance of
the repeated delays in project implementation and the high R/P ratios to shift 1P
reserves to 3P. Indeed, ONGC’s Assam asset has been a perennial under-performer
over the last 15 years with production halving to 22kbpd now. Three IOR and renewal
projects worth US$1.2bn are slated for completion over FY12-17 which ONGC hopes
will revive output. We are less optimistic given the history of multi-year delays here.
Sakhalin-1 cuts well known. The 370mboe cut to Sakhalin-1 is due to different
standards (ONGC uses the Russian reserve system, D&M uses SPE), differing field lives
(D&M uses 2031 as end year based on the contract, ONGC’s estimate runs to 2054 by
building extensions) and disagreements on reserves upsides (due to lack of sales
agreements and evacuation infra, D&M does not consider future developments). The
differences have been highlighted by ONGC in its prior annual reports and by partner
Rosneft in its 2006 prospectus. In our view, most of the differences at Sakhalin-1 stem
from lower gas reserves; these are a negligible value driver for ONGC today.
2P/3P reserves are higher. Indeed even on D&M’s lower estimates, Assam and
Sakhalin-1 1P cover extends to a very comfortable 24-35 years with a ~15 year overall
reserve cover. Further, given the limited impact on 1P reserves, concerns around
ONGC’s reserve base are exaggerated in our view. Notably the audits indicate that
2P/3P reserves are 2/23% higher driven by upsides in Mumbai High crude where GCA
estimates that 1P/2P/3P reserves can be sharply (9/72/43%) higher than ONGC’s own
estimate; ONGC has only used estimates based on the current development plans
whereas GCA include longer term developments and future water injections as well.
Maintain O-PF. We expect ONGC to continue to invest heavily in Mumbai-High
redevelopments, therefore. Nonetheless, its assets are mature and we do not
anticipate production growth to justify a secular investment theme; indeed FY12 has
started badly start with crude output down 2.4%YoY in April-May and gas down 1.3%.
Nonetheless, we expect ONGC to benefit from the inevitable policy interventions that
could drive earnings 10-20% higher. At <4x EV/Ebitda valuations are also supportive.
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