Buy ONGC; target of Rs 295: FinQuest Securities

FinQuest Securities is bullish on Oil and Natural Gas Corporation (ONGC) and has recommended buy rating on the stock with a target of Rs 295 in its November 19, 2012 research report.

“In Q2FY13, Oil and Natural Gas Corporation's (ONGC.IN) (ONGC.BO) top line was marginally below our estimates, however, bottom-line was ahead of our estimates. In the quarter, ONGC revenue decreased 13.3% Y-o-Y and 1.5% sequentially to Rs.198.9 bn below our estimates of Rs.203.2 bn mainly on account of lower than expected net crude oil realization, as against our expectation of a $48.2 per bbl, the net realization came in at $46.8 per bbl. In Q2FY13, ONGC's EBIDTA came in below our expectations at Rs. 103.7 bn, down 28.3% Y-o-Y and 6.8% sequentially as against our expectations of Rs. 113.1 bn; mainly on account of higher than expected employee expense and other operating expenditures. In the quarter, PAT declined 31.8% Y-o-Y and 3.0% sequentially to Rs. 59.0 bn ahead of our estimates of Rs. 55.9 bn mainly on account of lower than expected DDA expenses and higher than expected other income.”

“In Q2 FY13, ONGC's total crude output declined 4.6% Y-o-Y and 0.2% sequentially to 6.53 mmt which was marginally ahead of our estimate of 6.46 mmt. Despite the ongoing EOR/IOR projects, the oil production from the nominated field declined 7.0% Y-o-Y and 0.5% sequentially to 5.62 mmt; however, the oil production from the JV fields increased 13.6% Y-o-Y and 1.1% sequentially to 0.91 mmt. In the quarter, gas production declined 0.4% Y-o-Y and 1.0% sequentially to 6.35 bcm, inline with our estimates. As against the earlier guidance, ONGC has cut down FY13E oil production by 0.5 mmt to 27.0 mmt; however, for FY14, the company brought down the crude oil production target to 29.1 mmt, a 9.5% decline on account of delays in some of the marginal field development, while some of the production growth is likely to spill over to FY15. ONGC expect to produce 28.0 mmt crude oil productions from its own fields in FY15E, as against 25.8 mmt in FY14E and 23.6 mmt in FY13E. We model a crude oil production of 26.9 mmt and 28.5 mmt for FY13E and FY14E respectively. For FY13, ONGC has kept its gas production more or less intact at 25.7 bcm, however, cut down the gas production target by 3.6% to 26.4 bcm for FY14E. We model a gas production of 25.6 bcm and 26.0 bcm for FY13E and FY14E respectively.”

“In H1FY13, OVL's revenue declined 33.2% Y-o-Y to Rs. 82.79 bn mainly on account of lower production while the PAT declined 39.3% Y-o-Y to Rs.16.49 bn. In H1FY13, OVL witnessed decline in crude oil production across the fields with crude oil production down 33% Y-o-Y 2.276 mmt, however, gas production increased 4.8% Y-o-Y to 1.212 bcm primarily on account of increase in production from Sakhalin, Russia. We expect the production to increase in FY14, on account of start of production from North Sudan, blocks A-1 & A-3 in Myanmar, the Carabobo Project in Venezuela and the second phase of the BC-10 block in Brazil. In the quarter, upstream oil companies shared 40% of the gross under recoveries of Rs. 377.75 bn while ONGC shared 81.6% of the upstream subsidy burden."

"For the quarter, as per the petroleum ministry's subsidy sharing ONGC shared $56 per bbl as subsidy with OMCs which is calculated on the basis of both oil and condensate production. However, as per the company's opinion, since the company does not sell condensate, the effective subsidy burden on the crude oil sold came in at $63.05 per bbl. In the quarter, ONGC's subsidy increased 115.8% Y-o-Y but remained flat sequentially to Rs. 123.3 bn. For FY12, upstream oil companies shared 39.7% of the gross under recoveries. We estimate gross under recoveries of Rs. 1,574 bn and Rs. 1,156 bn for FY13E and FY14E respectively, as against our earlier expectations of Rs. 1447bn and Rs. 1459 bnfor FY13E and FY14E. The under recovery on diesel, which constitute 62% of gross under recoveries in H1 FY13, is on a decline after the diesel price hike the in the quarter. We model upstream subsidy share of 40% for FY13E and FY14E respectively.”

“We expect the consolidated revenue to grow at a CAGR of 9.7% over FY12-14E to Rs. 1771.2 bn; however EBIDTA is expected to increase at a modest CAGR of 5.8%. We estimate APAT to increase at CAGR of 5.0% to Rs. 287.2 bn over FY12-FY14E. We cut down our EPS estimates for FY13E and FY14E to Rs.28.5 and Rs. 33.6 respectively as against our earlier estimates of Rs.30.6 and Rs. 34.2 for FY13E and FY14E to factor in the lower than expected production both in the domestic and OVL acreages. At CMP, ONGC is trading at 9.1x FY13Eand 7.7x FY13E EPS of Rs. 28.5 and Rs. 33.6 respectively and at an EV/EBIDTA of 3.8x FY13E and 3.1 x FY14E. We value ONGC standalone business at Rs.220 per share implying an EV/ EBIDTA of multiple 4x and OVL at Rs.59 per share at EV/ boe of $5 per bbl for its 2P reserves. We value investments at Rs 16 per share, a 20% discount to the current market value. We maintain buy rating on the stock. Based on sum-of-parts valuation, we arrive at a revised fair value of Rs.295, implying an 14.4% upside from the current levels,” says FinQuest Securities research report. 

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