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Spark Capital : ONGC: Surprise! Azerbaijan Volumes To Be Accounted For In FY13E; Maintain Buy




Spark Capital Advisors(India) Private Limited


11 Dec 2012





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Surprise! Azerbaijan Volumes To Be Accounted For In FY13E; Maintain Buy ONGC Videsh (OVL) hosted its first ever stand alone conference call yesterday. We learnt that the effective date for OVL’s recent ACG acquisition in Azerbaijan has been set at 1st Jan’12. Hence, OVL will account for the volumes of 1.13MMT (15 months ending Mar’13) and related PAT of Rs. 6bn (our est.) in FY13. The $1bn deal is likely to be closed in 4QFY13 and we expect interest cost to start kicking in only by end of FY13 (expect $900mn debt). We increase our OVL’s EPS contribution by Rs. 0.7 to Rs. 4.3 to account for ACG volumes in FY13. On the $5bn Kashagan acquisition, contrary to market apprehensions, OVL remains confident of ramping up production close to phase I peak levels (370kbpd) over 2-3 years – in line with our view. The deal, if finalised could provide incremental PAT of Rs. 8bn/Rs. 20bn to OVL’s earnings in FY14E/15E. As detailed in our recent note dt. Nov 30, 2012, we remain confident on OVL’s turnaround and expect a 23% CAGR growth in volumes and 25% growth in OVL’s PAT (ex Kashagan). Valuations seem to be pricing in worst of subsidies and OVL’s earnings momentum would drive outperformance in near term. Further, investors get APM gas price hike (FY15) as an additional upside ($2/mmbtu hike could increase EPS by Rs. 6/share). Maintain Buy with a TP of Rs. 314 Key conference call highlights Azerbaijan acquisition ($1bn): The effective date for the $1bn acquisition has been set at Jan’ 12. OVL’s share of production for the 15 month period ending Mar’13 of 1.1MMT (0.9MMT for FY13E) would be accounted for in 4QFY13E. Based on reserve additions 134mmboe (including redevelopment project), the acquisition cost works out to $7.5/bbl of reserves. The transaction is likely to be completed by 4QFY13. Kashagan acquisition ($5bn): OVL expects volumes of 0.8MMT (Field production:~185kbpd) in FY14E and 1.5MMT (Field production: ~350kbpd) in FY15E. It guided for steady production ramp up to 340-350kbpd (phase I peak 370kbpd) over 2-3 years time, in line with ENI’s (Field operator) guidance. Based on 2P reserve estimates, the acquisition is priced at $18/bbl and $9.3/bbl (incl Ph 2) – fairly valued in our view. It expects a recurring opex of $8-$12/bbl for the field. Based on FY14E/15E volume guidance, Kashagan can add Rs. 8bn/Rs. 20bn to FY14/15 PAT. Pending Kazakh govt clearances, we have not yet factored in this acquisition in our estimates Funding structure: It is seriously looking at USD denominated debt as an option and would release more information soon Sudan/South Sudan: While production from South Sudan is likely to start by 4QFY13, it declined to comment on the ramp up period. Pipeline filing is expected to take 2-3 months and first volumes to OVL is expected in 1QFY14. We believe Sudan volumes would come back to normal levels in FY14 and could entail additional profits of Rs. 7.5-8bn

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