OVL's 10% Anadarko stake will bode well long-term: Quant

ONGC Videsh (OVL)'s USD 2.48 billion payout for a 10 percent stake in another Mozambique gas field from Videocon Group seems a bit expensive, says Gagan Dixit of Quant Global Research. He says Bharat Petroleum Corporation's (BPCL) had paid USD 2.4 billion for a 10 percent stake in Mozambique I.

"It is 10 percent premium versus the typical valuation provided," he told CNBC-TV18. 
However, he sees a lot of potential from this deal for ONGC in the long-term.  (Also Read: Will finance 10% Anadarko stake buy via overseas mkt: OVL)
With regards to Reliance Industries, Dixit believes that Rs 800 is very good price to enter the stock. 

Below is the verbatim transcript of Gagan Dixit's interview on CNBC-TV18 Q: How have you seen this latest acquisition by ONGC Videsh (OVL)? Do you think it is slightly on the expensive side? The stock was sulking in the morning.
A: It is slightly expensive. For the similar stake for the Bharat Petroleum Corporation's (BPCL) 10 percent in Mozambique I, the value was around USD 2.4 billion. So, it is 10 percent premium versus the typical valuation provided. It is a promising block and presently around 60 trillion cubic feet (tcf) is the reserve potential expected somewhere in the next five years.
There is currently around 10 million tonne of liquefied natural gas (LNG) plant that has already started working. So there is a huge potential that 10 million tonne LNG can go up to 30-40 million tonne and that upside can be possible for the ONGC, but it is a long-term thing. Q: In the near-term where do you see the stock headed? It has already lost about 2.5 percent. Indian Oil Corporation's (IOC) under-recovery burden for FY14 stands at Rs 1.4 lakh crore versus the first estimate of Rs 80,000 crore. What is the call on Oil and Natural Gas Corporation (ONGC) and the target price?
A: For the under-recoveries although it is very tough, because usually it is in the fourth quarter that it is typically decided, but if these upstream PSUs will continue to provide discount around USD 56/barrel on their crude production similar to the last year level, it will be up to the government to bear the losses.

The USD 56/barrel is already on the higher end provided by ONGC and Oil India. When global crude prices are around USD 105, they are just getting USD 45-50 net realisation and out of that around USD 40 is their cost if you include the capex, they already pay at the maximum level. There is an increase in the under-recovery if anything happens and that is the maximum limit of the ONGC.

The problem is not the risk of the under-recoveries but when they continue to pay higher subsidy burden there is the problem in the development of their already planned new oil and gas production. This is because then the question is that whether they are viable at just USD 45-50 crude prices and then we still get to know how much higher gas prices will they get. Given all these things, there is slight risk on the stock even at present levels. Q: So far the market has been pricing in the worst case scenario as the absolute number coming in same for ONGC and that was the case in Q1 as well. Now the under-recovery projection may already be Rs 1.4 lakh crore. Is there just an outside risk that maybe ONGC actually ends up paying more than last year even in absolute terms?
A: In absolute terms it is possible. They are paying at flat USD 56 on discount on crude production. Last year's INR was something below 50/USD level. If this current 60/USD is average INR rate for FY14 then definitely there is some 20 percent increase that their subsidy burden in INR terms, although in dollar terms it will remain the same. Q: Reliance Industries (RIL) has fallen quite a bit. At Rs 800 is it attractive or do you think that there is more downside and you will get better levels to re-enter?
A: Rs 800 is very good price to enter the stock. The possible reason for this correction in the stock is the underperformance of gross refining margin (GRM) globally and especially the light distillates. This driving season is coming to an end in the US so there is correction in the prices in gasoline globally. There is less demand from the light distillate side.
Even Singapore GRM has fallen to USD 4.5 level. It is a seasonal thing and if market is pricing in those type of GRM for RIL stock then this is the time to enter this stock. It is not just the GRM factor, in the second half of this fiscal there is expectation that their polymer chain will start commissioning so that will further add 10-20 percent in EBITDA versus the last year's level of the petchem side.
There is also US shale gas production that has already increased 70 percent Y-o-Y basis and at least 40-50 percent further increase is expected this year based on the number of rigs that they have deployed and the rate of wells they are drilling. Then there is further support from the gas prices.
As more and more new terminals are coming for approval there is at least support for the gas prices as we expect for the US gas. So, these are some of the things further playing and then additionally there are discoveries that would further add value to RIL.
Earlier, the problem was that from the domestic non-performing asset (NPA) side that was not viable at USD 4.2 gas price. If we factor in more than USD 8 then whatever they discover, even marginal feed has become viable and that would further add value to RIL.