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UBS Investment Research
Oil & Natural Gas Corporation
I n the pay zone
Event: slower progress on reforms but no worries
Our recent update pointed to slower progress on oil price reforms, but at the same
time, a weaker economy could lead to lower crude prices. Overall, we believe this
should lead to a lower YoY subsidy payout for ONGC.
Impact: rewards outweigh the risks: stress case realisation of US$50/bbl
We work out the valuation under three scenarios of net realisation up to FY17: the
stress case (US$50/bbl), our base case (US$60/bbl) and best case (US$70/bbl) at
Rs340/sh, Rs360/sh and Rs381/sh. Every US$10/bbl decrease in realisations
affects FY13E EPS by ~20%. We lower our net realisation for ONGC as these
have not been above US$60/bbl more than three times in the last 20 quarters. We
incorporate Rs10/sh from Cairn royalty upside (lower than our estimated upside of
Rs18/sh).
Action: limited downside but FPO may be a better buying opportunity
We lower our FY12/FY13/FY14 EPS estimates by 2.4%/6.6%/7.1% to reflect a
more conservative approach. We now incorporate a net realisation of US$60/bbl vs
US$67/bbl earlier given the slower pace of reforms. At this point, we see very little
risk to our revised target, although we do believe that given the large size of the
FPO and that normally such deals have had some discount, many investors may
wait for the FPO.
Valuation: lower PT from Rs385 to Rs355 on lower net realisation
We use our sum-of-the-parts methodology to value ONGC. We use DCF to value
the domestic business and value the company’s overseas reserves at Rs73/sh on an
EV/boe basis.
Oil & Natural Gas Corporation
ONGC is the largest oil exploration and production companies in India. It has
reserves of approximately 1.0bn tonnes of oil and oil equivalent gas. ONGC has
one of the lowest finding, development, and lifting costs, and reasonably high
reserve/production ratios. ONGC is 74% owned by the government of India. It
operates in a regulated market whereby the government controls crude and gas
pricing. Its FY09 revenue was US$23.78bn.
Statement of Risk
Subsidy burden is the main risk for ONGC. The company subsidises crude oil to
the OMCs (Oil marketing companies) which sell petrol, diesel, kerosene and
LPG at lower than market regulated prices. E&P business in general is risky by
nature as the success of exploration is probabilistic.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Oil & Natural Gas Corporation
I n the pay zone
Event: slower progress on reforms but no worries
Our recent update pointed to slower progress on oil price reforms, but at the same
time, a weaker economy could lead to lower crude prices. Overall, we believe this
should lead to a lower YoY subsidy payout for ONGC.
Impact: rewards outweigh the risks: stress case realisation of US$50/bbl
We work out the valuation under three scenarios of net realisation up to FY17: the
stress case (US$50/bbl), our base case (US$60/bbl) and best case (US$70/bbl) at
Rs340/sh, Rs360/sh and Rs381/sh. Every US$10/bbl decrease in realisations
affects FY13E EPS by ~20%. We lower our net realisation for ONGC as these
have not been above US$60/bbl more than three times in the last 20 quarters. We
incorporate Rs10/sh from Cairn royalty upside (lower than our estimated upside of
Rs18/sh).
Action: limited downside but FPO may be a better buying opportunity
We lower our FY12/FY13/FY14 EPS estimates by 2.4%/6.6%/7.1% to reflect a
more conservative approach. We now incorporate a net realisation of US$60/bbl vs
US$67/bbl earlier given the slower pace of reforms. At this point, we see very little
risk to our revised target, although we do believe that given the large size of the
FPO and that normally such deals have had some discount, many investors may
wait for the FPO.
Valuation: lower PT from Rs385 to Rs355 on lower net realisation
We use our sum-of-the-parts methodology to value ONGC. We use DCF to value
the domestic business and value the company’s overseas reserves at Rs73/sh on an
EV/boe basis.
Oil & Natural Gas Corporation
ONGC is the largest oil exploration and production companies in India. It has
reserves of approximately 1.0bn tonnes of oil and oil equivalent gas. ONGC has
one of the lowest finding, development, and lifting costs, and reasonably high
reserve/production ratios. ONGC is 74% owned by the government of India. It
operates in a regulated market whereby the government controls crude and gas
pricing. Its FY09 revenue was US$23.78bn.
Statement of Risk
Subsidy burden is the main risk for ONGC. The company subsidises crude oil to
the OMCs (Oil marketing companies) which sell petrol, diesel, kerosene and
LPG at lower than market regulated prices. E&P business in general is risky by
nature as the success of exploration is probabilistic.
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