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(Delayed) Spark Capital : ONGC & OIL India: Carabobo starts test production; Ramp up likely to be slower than expected




Spark Capital Advisors(India) Private Limited


08 Jan 2013





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Carabobo starts test production; Ramp up likely to be slower than expected We interacted with the management of Repsol (Spain), the operator of Carabobo Project where ONGC, OIL and IOCL have 11%, 3.5% and 3.5% stakes respectively. While the first oil production started on 27th Dec 2012 as per schedule, the ramp up is likely to be slower than expected. Repsol guided that initial production would be from test wells and given the heavy nature of the crude and field complexity it would ramp up to average 50-60kbpd in CY14 and gradually ramp up to 370kbpd by 2017. This is slightly lower than our expectation of avg production of 40kbpd in FY14 and 100kbpd in FY15. Nevertheless, this project remains an attractive proposition for the consortium partners given the prolific nature of the field and reasonable fiscal terms. We would closely watch the marketability of this test production to get some comfort on sustainable price levels. Incorporating the latest guidance by Repsol, we slightly reduce our Carabobo production estimates for ONGC Videsh (OVL) from 40kbpd/100kbpd to 30kbpd/55kbpd in FY14/15. This would reduce our OVL EPS contribution marginally by around 2% to Rs. 5.7/share in FY14 and Rs. 6.5/share in FY15. For OIL India (~3.5% stake), the asset would help diversify the operations. While the profits would be miniscule initially, it could provide 4% upside to OIL’s current earnings by FY16. In line with ONGC, we roll forward OIL’s valuation to FY14 and increase our OIL’s TP to Rs. 638 (Rs. 591). Maintain Buy on ONGC and OIL Key takeaways First oil: First oil production has begun with initial level of 600bpd. This is test production and ramp up would happen over next few years. Repsol is targeting to reach avg production of ~50kbpd in CY14 and 370kbpd in CY17. This heavy (API 8) crude would be diluted and mixed with light crude oil from other fields to make it commercially viable. We estimate a wide discount of 35-40% to Brent for this heavy crude until installation of upgrader (COD CY17). Upgrader: The FID for upgrader facilities has not happened yet. Repsol targets to achieve FID in the next one year. The upgrader would have capacity to upgrade 200kbpd of heavy crude (API 8 degrees) into 170kbpd light crude (API 32 degrees). This would be blended with 200kbpd of heavy crude (API 8 degrees) to achieve 370kbpd of blended crude (at API degree 16-19). As per Repsol, the blended crude could be sold at a discount of 15-20% to Brent. Fiscal regime: Windfall tax is not applicable on the Carabobo Project until the entire capital cost is recovered. Hence, only 33.3% royalty and 50% income tax is applicable. Assuming a 40% discount to Brent (without upgrader), the consortium would earn a PAT of $14/bbl. Marketing of heavy crude: As per Repsol, 165kbpd of heavy crude would be exported to Repsol’s Spanish refineries and rest to other players. This gives good marketing visibility for this heavy crude Contribution to ONGC and OIL India: Contribution to ONGC EPS from this asset would be Rs. 0.11/ Rs. 0.19/ Rs. 0.63/ Rs. 0.98 for FY14/15/16/17. For OIL India, the asset would diversify its domestic operations; though profits are likely to be miniscule at the start (1% of standalone earnings) it could provide ~4% upside to current earnings by FY16.

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