Oil and Natural Gas Corp -- Searching for growth; Subsidy a drag :: Macquarie Research,

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Oil and Natural Gas Corp
Searching for growth; Subsidy a drag
Event
 ONGC reported a bottomline of Rs 40.95bn, a growth of 47% QoQ and 12%
YoY. EBITDA at Rs 94.7bn was in line with our estimates but mildly lower
than consensus. 79% YoY higher other income supported the bottomline, We
maintain our Neutral rating, with a reduced TP of Rs 293 (from Rs 303).
Impact
 Standalone production decline offset partially by Cairn India’s ramp-up:
ONGC’s own 1QFY12 oil production declined by 2% YoY to 5.93 MMT, which
was ahead of its target of 5.8 MMT. Its 30% stake in Cairn’s Rajasthan block
boosted production including the JV by 2.4% YoY, but yet it declined 1%
QoQ. Gas production (including JV) fell 4% YoY and 2.3% QoQ to 6.16 BCM.
 OVL increased crude production 3.3% YoY, but well short of targets:
When acquiring Imperial Energy, ONGC’s overseas subsidiary OVL had
forecast production to increase from 5,600 bpd to 80,000 bpd; however, in
Q1FY12 it produced only 17,267 bpd (12% YoY growth). OVL production
increased only 3.3% due to higher production from Imperial (Russia),
Sacristobal (Venezuela) and Sakhalin-1 (Russia) that was mostly offset by
declines in Sudan and BC-10 (Brazil).
 High subsidy of Rs 120bn curtailed net crude realizations to US$49/bbl:
While gross crude oil realizations for ONGC increased 50% YoY to US$ 121
/bbl, post-subsidy realisation remained stagnant at US$49/bbl due to the
subsidy burden more than doubling. ONGC contributed 83% (vs the usual 81-
82%) of the upstream share of under-recoveries which was brought down to
the usual 33% (vs 38% in Q4FY11, which had accentuated profits drastically)
 Rs 11/sh NPV could be added if Cairn India shares Rajasthan royalty:
The Govt. of India has asked Cairn India to bear a proportionate share (70%)
of the royalty in the Rajasthan block as a pre-requisite to the Vedanta deal.
We estimate that ONGC would gain by an NPV of Rs 11/share or 4% of CMP.
Earnings and target price revision
 Our FY12-14E PAT cut by 3-5% on lowered volume growth assumptions and
mildly higher subsidy. TP cut by 3% to Rs 293/sh.
Price catalyst
 12-month price target: Rs293.00 based on a DCF methodology.
 Catalyst: Petroleum pricing reforms; Sistema deal; Clarity on subsidy sharing
Action and recommendation
 ONGC had a strong 3P reserve replacement ratio (RRR) of 176% and
maintained its 1P reserves in FY11. The stock is trading at cheap valuations
of US$ 6.9/bbl EV/1P reserves (vs the global average of US$18/bbl), but a
lack of volume growth in the medium term, and a high subsidy remain
overhangs.
Cairn India (CAIR IN, UP, Rs 311, TP: Rs 280)