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Spark Capital: ONGC 3QFY13 Results Review: In line quarter; Diesel and APM Gas price hikes would remain the key triggers; Maintain Buy




Spark Capital Advisors(India) Private Limited


11 Feb 2013





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In line quarter; Diesel and APM Gas price hikes would remain the key triggers; Maintain Buy ONGC reported in line underlying PAT of Rs. 56bn, down 4% qoq (+20% yoy). Higher sales volume despite flat production and better net realisations led to qoq 9% growth in EBITDA. However, surprisingly higher Depletion and lower other income led to 4% decline in underlying PAT. Subsidy for the quarter (Rs. 124bn) was based on $56/bbl in line with previous quarters. Despite the recent rally on announcement of monthly Diesel price hikes, ONGC stock trades at undemanding valuation of 8x FY14E and EV/2P reserves of ~$5/boe. Even after all the subsidy related concerns, ONGC (incl OVL) has been yielding core earnings of $12-$14/bbl which is quite attractive. We believe successful implementation of diesel hikes (atleast for 8-10months), gas price hikes and OVL turnaround would further push up valuations. Maintain Buy with TP of Rs. 387 Upstream share: Upstream subsidy share continued to be determined based on $56/bbl. It was Rs. 151bn on the gross under recovery of ~Rs. 393bn for 3QFY13, flat qoq. We expect FY13 gross oil under recovery of Rs. 1.6tn and upstream share of ~Rs. 600bn based on GAIL plus $56 per bbl of ONGC-OIL sales volumes. ONGC is in talks with MoPNG to remove internally consumed condensate (~9% of production) from subsidy calculation, which could further benefit ONGC. ONGC’s accruals can match FY13E capex of Rs. 300bn at net realisations of $44-45/bbl Volume Growth: ONGC maintained its FY14 production of 29.1mmt of Oil (ONGC – 25.78 & JV - 3.3) and 26.4bcm of Gas (ONGC – 24.6 & JV – 1.8) implying a growth of 7% which looks quite aggressive given the delays in marginal field projects. We conservatively estimate 54.4MMT of O&G production in FY14 (5% growth) and similar growth in FY15E. Gas price hike: While cost of production of APM gas is around $3.7/mmbtu, higher prices is warranted to drive efficiency programs in aged APM fields and monetisation of isolated discoveries. Since there is no fixed date for revision of APM gas prices, the timing is not yet certain. A $4 increase in APM Gas prices could drive ~Rs. 12/share increase in ONGC’s earnings (Rs. 120/share upside in valuations @10x) OVL: OVL’s 3Q production (excl Syria) increased by 15% qoq to 1.88mmtoe, driven by higher gas production (+0.24mmt) as Vietnamese volumes returned to normalcy after a seasonally weak 2Q and new production from Columbia and Venezuela (0.12mmt) supported growth. OVL expects South Sudan to resume production in 1QFY14. On Azerbaijan, OVL is confident of closing the deal by Mar’13, however, any slippages would result in the 15 month production volume (Jan’12 – Mar’13) of ~1.13mmt getting accounted in FY14E production

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