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Oil & Natural Gas Corp. (ONGC.BO)
Buy Equity Research
Risk-reward favourable amid ongoing FPO uncertainty; CL-Buy
What's changed
CNBC TV-18 reported that the timeline of the ONGC FPO will be decided in
the first week of October. Also, the Ministry of Disinvestment said in an
interview on Sep 26 that they do not want to proceed with the share sale at
inexpensive valuations, and hence had deferred the share sale (FPO) by a
fortnight. The FPO had raised expectations of some regulatory action on
fuel pricing in order to give some clarity on subsidy burden of state-owned
upstream companies, in our view. Therefore, we believe the deferment has
now led to uncertainty in the market on the policy front. Amid the ongoing
uncertainty, we conduct a risk-reward analysis on ONGC to assess how its
FY12E earnings would move under various scenarios of subsidy and find
the outcome quite favourable for the stock.
Implications
Our risk-reward analysis of ONGC indicates that even in the likely worstcase scenario, whereby the upstream companies contribute 50% of the
projected under-recoveries of Rs1210bn, (ONGC’s share Rs502bn) ONGC’s
FY12E EPS would decline to Rs27.7 at the ytd average Brent oil price of
US$115/bbl. This compares with our base-case subsidy scenario EPS of
Rs33. FY12E EPS could range between Rs27.7-Rs40.9 under various
subsidy scenarios at US$115/bbl, in our view.
Valuation
We reiterate our Buy rating (on Conviction List) and our 12-month
Director’s Cut-based target price of Rs330, implying 27% potential upside.
Our valuation assumes ONGC’s net oil realization of US$53.5/bbl in FY12E.
Despite low operating and F&D costs, reasonable reserve replacement,
high reserve life, and attractive returns, ONGC is trading at FY12E EV/DACF
of 4.8X versus an eight-year historical range of 4.0X-9.5X.
Key risks
1) Spike in crude oil prices, 2) higher subsidy burden, 3) lower production.
INVESTMENT LIST MEMBERSHIP
Asia Pacific Buy List
Asia Pacific Conviction Buy List
Coverage View: Neutral
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Oil & Natural Gas Corp. (ONGC.BO)
Buy Equity Research
Risk-reward favourable amid ongoing FPO uncertainty; CL-Buy
What's changed
CNBC TV-18 reported that the timeline of the ONGC FPO will be decided in
the first week of October. Also, the Ministry of Disinvestment said in an
interview on Sep 26 that they do not want to proceed with the share sale at
inexpensive valuations, and hence had deferred the share sale (FPO) by a
fortnight. The FPO had raised expectations of some regulatory action on
fuel pricing in order to give some clarity on subsidy burden of state-owned
upstream companies, in our view. Therefore, we believe the deferment has
now led to uncertainty in the market on the policy front. Amid the ongoing
uncertainty, we conduct a risk-reward analysis on ONGC to assess how its
FY12E earnings would move under various scenarios of subsidy and find
the outcome quite favourable for the stock.
Implications
Our risk-reward analysis of ONGC indicates that even in the likely worstcase scenario, whereby the upstream companies contribute 50% of the
projected under-recoveries of Rs1210bn, (ONGC’s share Rs502bn) ONGC’s
FY12E EPS would decline to Rs27.7 at the ytd average Brent oil price of
US$115/bbl. This compares with our base-case subsidy scenario EPS of
Rs33. FY12E EPS could range between Rs27.7-Rs40.9 under various
subsidy scenarios at US$115/bbl, in our view.
Valuation
We reiterate our Buy rating (on Conviction List) and our 12-month
Director’s Cut-based target price of Rs330, implying 27% potential upside.
Our valuation assumes ONGC’s net oil realization of US$53.5/bbl in FY12E.
Despite low operating and F&D costs, reasonable reserve replacement,
high reserve life, and attractive returns, ONGC is trading at FY12E EV/DACF
of 4.8X versus an eight-year historical range of 4.0X-9.5X.
Key risks
1) Spike in crude oil prices, 2) higher subsidy burden, 3) lower production.
INVESTMENT LIST MEMBERSHIP
Asia Pacific Buy List
Asia Pacific Conviction Buy List
Coverage View: Neutral
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