Accumulate ONCG; target of Rs 301: Prabhudas Lilladher

“OVL has agreed to buy Hess Corporation’s 2.72% interest in the Azeri, Chirag and Guneshli (ACG) Fields in Azerbaijan and its 2.36% interest in the associated Baku TbilisiCeyhan (BTC) pipeline for US$1bn. The transaction, expected to close in the first quarter of 2013. ONGC is paying around 15% premium over BP- SOCAR deal (2011) and 10% premium to BP-Devon deal (2010) for the field. While the valuation at US$6.8/bbls (ex-pipeline) seems attractive prima-facie, however higher government take (68%), recent transaction multiples and mature nature of the field (1HCY12 production declines 11%) leaves limited value accretion potential for ONGC.”

ONGC has also picked up stake in the pipeline, which was built with capex of US$3bn, we if exclude the value of the same ( US$71mn), the net value paid for the E&P operations is US$930mn. If we were to compare the same with BP’s stake sale in the field to SOCAR, the same is around 15% expensive. On 16th August, 2010, BP acquired Devon’s 3.29% interest (after pre-emption exercised by some of the partners) for US$1.1bn. Thus, on a comparative basis, the Devon-BP deal valuations were cheaper than ONGC deal.

“The acquisition is part of OVL’s strategy to increase its production to 20MMTPA by 2020 from current levels of 8.7MMTPA. The field would add around 10.6% production for OVL on gross basis. Given higher government take and declining production at fields, we do not expect material net take for ONGC on consolidated basis. However, Owing to headwinds in the form of uncertainty on subsidy-sharing mechanism and increasing under recoveries in the system. We believe things are unlikely to improve significant going ahead and upstream PSU will be a cash cow for sharing incremental subsidy burden. We value ONGC at 9x FY2013E EPS arriving at a value of Rs301/share. Accumulate the stock for target of Rs 301,” says Prabhudas Lilladher research report.

Public holding more than 90% in Indian cos

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