ONGC 3QFY12 result preview: Nirmal Bang

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ONGC 3QFY12 result preview: Nirmal Bang

Nirmal Bang has come out with its report on ONGC 3QFY12 result preview. ONGC to benefits from rupee slide.

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Nirmal Bang has come out with its report on ONGC 3QFY12 result preview. ONGC  to benefits from rupee slide. 

3QFY12 earnings just a facade, reality check in 4QFY12: Following a higher subsidy burden in 3QFY12 compared to the previous quarter on higher gross under-recoveries, we expect ONGC net profit at Rs67.29bn (down 9% YoY & 22% QoQ). We have considered 33% of upstream companies' burden to calculate overall subsidy burden, but given that gross under-recoveries are expected to surpass Rs1,400bn, a key factor to determine earnings is the quantum of subsidy the government will pass on to upstream companies. We maintain our Buy rating on ONGC with a target price of Rs338, as the current market price implies the realisation will slip below US$45/bbl.

Subsidy burden to increase on YoY, QoQ basis: We expect gross underrecoveries in 3QFY13 at Rs333bn (up 119% YoY, 50% QoQ). We have assumed upstream companies' burden at 33% of gross under-recoveries. In the past two quarters the subsidy burden was calculated at the same percentage but is likely to increase considerably in 4QFY12. Given the fact that for the first time total subsidy burden is expected to be higher than the revenue generated from tax collected, we expect upstream companies' burden to rise to ~45-50% in 4QFY12. For 3QFY12, we estimate subsidy/barrel at US$45.83/bbl compared to US$33.24/bbl in 2QFY12. Net realisation from nomination blocks is seen at US$65.17/bbl compared US$83.70/bbl in 2QFY12.

Rupee slide to boost gas revenue: The rupee has depreciated 11.9% in 3QFY12 to average at Rs51.2/$. With both crude oil and gas realisations benchmarked in US dollar terms, ONGC benefits from the rupee slide. Crude oil gross realisation increased by 6% to Rs5,683/bbl and net realisation remained flat at Rs3830/bbl on a sequential basis. Net realisation remained flat as the crude oil depreciation impact is negated by higher subsidy burden. As regards gas revenue, rupee depreciation is likely to increase realisation by 11% to Rs7,655/tscm in 3QFY12 compared to Rs6871/tscm in the previous quarter, on a blended basis.

Volume growth to not surprise financials: Crude oil production growth is expected to be flattish on YoY basis and up 3% on QoQ basis to 6.21mmt from nomination fields. Oil production from joint venture fields is likely to be 0.77mmt (down 5% YoY and 3% QoQ). Management has guided crude oil volume for FY12 at 23.91mmt, which means 76% of the production target will be met. As regards gas production, volume from nomination blocks is likely to be up 1% QoQ and YoY each at 5.86bcm and JV blocks' production is seen flat YoY at 0.54bcm. Compared to FY12 gas volume guidance of 23.19bcm, nearly 74% of production will be achieved.

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