Neutral on ONGC: DSP Merrill Lynch

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Neutral on ONGC: DSP Merrill Lynch

DSP Merrill Lynch is not so bullish on ONGC and has recommended neutral rating on the stock.

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ONGC BSE | NSE 25/05/12 Are Mutual Funds betting on ONGC?

DSP Merrill Lynch is not so bullish on ONGC and has recommended neutral rating on the stock.

The DSP Merrill Lynch report on ONGC:

Gas discovery could boost ONGC value by Rs33-50/share

Press reports suggest ONGC has made a gas discovery of 21tcf in a deep water block in the KG basin, in which it has 90% interest. As indicated by the regulator it is too early to estimate the size of reserves. However, even if one were to assume in-place gas reserves to be indeed 21tcf (3.5bn boe), valuation of ONGC's share of reserves based on two different sets of assumptions works out to US$1.6-2.4bn (i.e. Rs33-50/share). One of the main reasons the valuation appears relatively low is that we do not expect gas production to start for at least six years (i.e. until FY13).

Value of discovery could be US$0.8-1.1/boe

Not only is it too early to confirm size of the discovery but other crucial data like fiscal terms, capex, operating cost, production profile and gas price are not yet available. We have, however, made an attempt to calculate the fair value in two scenarios. In the conservative case we have assumed a recovery rate of 60%, peak output of 40mmscmd (14.6bcm pa) and gas price of US$4/mmbtu. In the optimistic case, recovery rate is taken at 70%, peak output at 60mmscmd and gas price at US$4.5/mmbtu. Valuation works out to US$1.8-2.6bn (US$0.8-1.1/boe).

Valuation to rise as one moves closer to production date

As one moves closer to the production date, fair value will rise. We estimate fair value will be US$3.7-5.3bn (US$1.8-2.2/boe) in FY12E. Valuation of ONGC's 90% share in the reserves will be US$3.3-4.8bn (Rs70-100/share).

DGH has confirmed find but says too early to know size

Press reports put reserves in KG-DWN-98/2 at 21tcf (trillion cubic feet). The Indian upstream regulator DGH has been quoted in the press confirming the find. The report quotes the DGH as saying "it seems like commercial". The DGH, however, believes it is too early to comment on the size of the discovery.