Oil & Natural Gas Corporation -Lower DD&A costs drive result: Prabhudas Lilladher,

ONGC’s Q1FY13 EBITDA increased 18.9% YoY but down ~4% QoQ to Rs111.3bn,
lower than our estimates (PLe Rs117.5bn), on the back of flat crude oil (-1% QoQ)
and gas production (+1% QoQ) along with the impact of higher cess (+77% YoY). Net
realization on own crude for the quarter stood at US$46.6/bbl. As per our
understanding government has arrived ONGC’s standalone net realization at 46.62/
bbl is a result of a $56/ bbl discount on ONGC’s standalone production (incl.
condensates). Lower than expected DD&A costs at Rs31.8bn (PLe Rs40.3bn) on
account of lower dry well write offs and lesser exploratory activity during the
quarter. Consequently, PAT stood at Rs60.78bn higher than our expectation of
Rs52.87bn. We maintain ‘Accumulate’ on the stock.

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􀂄 Key concall takeaways: OVL O+OEG production declined by 22.7% YoY on the
back of lower production at Syria (-33%), Sudan (-81%), and Russia. Although
South Sudan government has reportedly reached an agreement (Agreed to pay
$11/bbl transportation and processing charges to North Sudan), start of
production at the South Sudan block is still some time away. Management
expects crude oil production to increase from its current levels; however the
exact numbers are yet to be finalised over next quarter.
In terms of the new discovery at D1, the management communicated that the
discovery is at a nascent stage and further exploratory activity Is required to
quantify the recoverability of the additional in place volumes of ~400 mnboe,
peak production of ~60kbopd is expected only in 2015. As per our calculations
impact of the new discovery would be not be significant at ~Rs5.4/share
(assuming 30% recovery factor).
􀂄 Outlook: Owing to headwinds in the form of uncertainty on subsidy-sharing
mechanism and increasing under recoveries in the system. We believe things are
unlikely to improve significant going ahead and upstream PSU will be a cash cow
for sharing incremental subsidy burden. At 4x FY2013E EV/EBITDA, 8.5x FY2013E
EPS, we believe the stock is fairly valued given the uncertainty over the subsidy
burden. We value ONGC at 9x FY2013E EPS arriving at a value of Rs301/share.