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  • Adjusted for one-time royalty reimbursement for the Rajasthan JV, ONGC posted weak operational results in Q3 FY12 with revenue & production volume in line with estimates whereas higher than expected tax rate resulted in lower than expected net profit.
  • Q3 FY12 subsidy doubles q-o-q to $66.8/bbl ($65.7/bbl expected)
  • This was due to adhoc increase in upstream sector's share of Q3 FY12 under recoveries to 47.1% from 33.4% in Q2 FY12. Hence, ONGC's subsidy burden shot up to Rs 125,363.3 mn ($66.8/bbl) in Q3 FY12. This was twice the subsidy burden of $33.2/bbl in Q2 FY12, and almost thrice the Q3 FY11 figure of $24.3/bbl. Consequently, net realization plunged from $83/bbl in Q2 FY12 to $45/bbl in Q3 FY12.
  • Q3 FY12 production in line with our estimates
  • Oil output from nomination blocks at 5.96 MMT dropped by 0.08 MMT q-o-q and was 0.25 MMT lower y-o-y. JV crude output at 0.78 MMT was lower by 0.02 MMT q-o-q and 0.04 MMT y-o-y. Gas production from nomination blocks at 5.86 bcm was up 0.03 bcm q-o-q & 0.05 bcm y-o-y. JV gas output at 0.54 bcm was flat y-o-y & down 0.02 bcm q-o-q. VAP production of 812 MMT was up 1.9% q-o-q & 4.1% y-o-y.
  • Q3 FY12 adj. net sales at Rs 178.9 bn versus estimate of Rs 172.3 bn
  • Adjusted crude sales for Q3 FY12 stood at Rs 116.1 bn, 2.4% higher than our estimate. While nomination crude sales at Rs 86.7 bn was in line with estimate, adjusted JV crude sales of Rs 29.4 bn was 9.6% higher than our estimate due to higher realization from the Rajasthan JV. Total gas sales for Q3 FY12 stood at Rs 38 bn, 4% ahead of our estimate on better realizations. VAP sales of Rs 27.3 bn was above expectation on account of steep rupee depreciation aiding realizations.
  • Upstream subsidy sharing for Q4 FY12 expected to be same as Q3 FY12
  • The upstream sector's share of the gross under recoveries, which was fixed at ~33% during FY08-10, had been increased suddenly to ~39% in FY11. Since our FY12 & FY13 estimates of gross under-recovery at Rs 1,297 bn & Rs 1,138 bn are significantly higher than the gross under recovery of Rs 782 bn in FY11, we assume 39% of the gross subsidy burden to be borne by the upstream sector going forward. We expect the upstream sector to again bear 47% of Q4 FY12 under recoveries, thus, taking the FY12 upstream subsidy share to 39% of total under recoveries.
  • Outlook and Valuation
  • We believe the stock would react to news flow regarding the subsidy sharing pattern that would emerge over the course of this year. We expect consolidated revenue & PAT to post FY11-13 CAGR of 10.8% & 9.9% respectively. We estimate EPS of Rs 31.5 and Rs 31.7 in FY12 & FY13 respectively. Our SOTP valuation for ONGC yields a target price of Rs 326. Our price target translates into EV/boe of $5.7/boe and FY13E P/E of 10.3x.

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