Buy Oil and Natural Gas Corporation: Ventura

Ventura is bullish on Oil and Natural Gas Corporation (ONGC) and has recommended buy rating on the stock in its May 31, 2012 research report.

“Despite lower crude production, ONGC’s net profit registered robust growth of 102% to Rs 5644.4 crore on the back of higher realizations led by depreciating rupee. Net sales for the quarter rose by 22.2% qoq & 3.8% yoy to Rs. 18,819.3 crore. Net Realizations in dollar terms rose by 14.7% to USD 44.32 /bbl while that in rupee grew by robust 27.1% to Rs 2229 crore helped by the depreciation.”

“During the quarter, ONGC shelled out Rs 14,170 crore towards fuel subsidy as against 12,136 crore in Q4FY11. The total subsidy burden for the year stood at Rs 44,466 crore. It is learnt that, the upstream companies bore 40% instead of the previous 38% of the total under-recovery with subsidy calculated on the basis of the quantity of crude sold. GoI ad hoc subsidy sharing mechanism remains a big overhang on the stock. With no information from the government on the future sharing mechanism and up-ticking crude prices, we expect the upstream companies to continue to bear 40% of the under recoveries going forward. Considering the huge capex plans, we expect the huge subsidy burden to mar ONGC’s financial health.” 

“Driven by the higher crude prices, ONGC gross realization stood at $ 121.64 per barrel v/s $ 108.9 per barrel, up by 11.7% yoy. However, post discount to the OMCs, net realization stood lower at $ 44.32 per barrel v/s $ 38.75 per barrel, up by 27.1% yoy.” During the quarter, higher depletion, depreciation and amortization (DD&A) cost at Rs 1349.3 crore down by 41.5% yoy on account of lower write offs of the dry wells and one-off item of Rs 700 crore on account of depreciation of the pipeline in Q4FY11. The company made 3 discoveries during the quarter. Taking the total discoveries to 23, for the full year. OVL, ONGC overseas subsidiary, reported revenue of Rs 22,637 crore for FY12 as against Rs 18,671 crore in FY11 led by higher realizations as production dipped to 8.75 mtoe v/s 9.45 mtoe in FY11. The profit after tax stood at Rs 2,721 crore, up by meager 1.1% over 2,691 crore in FY11 on account of impairment of Rs 1953 crore w.r.t to Imperial Energy, as the asset is performing lower than the estimated value due to complexities in exploration.”

“OVL which derives almost 40% of its revenue from Sudan, Syria and Imperial Energy, is facing constant issues one after the other, keeping production under check. Imperial Energy continues to face reservoir issues thus capping its production at current levels of 14,000 bpd. In addition, the political tensions between Sudan North and Sudan South have triggered a production loss of 0.5MMT during FY12 and are currently producing at a rate of 40,000 bpd. Declining production in the domestic fields and restricted production at OVL has led to negative volume growth for ONGC. However, the management seems confident of achieving high growth in the next years backed by EOR activities in the domestic assets. In addition to restricted growth in production, lack of policy action by the government on the rising under recoveries remains an overhang on the stock. Increase in upstream companies share in under recoveries from 33% a year back to 40% now, further adds to the blow.”

“With lack of political support to the government, any hike in diesel prices or partial de regulation can be ruled out. Led by these concerns, we expect the stock to remain under pressure in the near term. However considering ONGC reserves and strong perspective plan 2030, we remain bullish on the long term potential of the stock and we expect both the domestic and international production to improve. Further, we expect the temporary issues with OVL to be resolved over a period of time further enhancing OVL’s production. Currently, the stock is trading below the mean band of its historical valuations at 8.3x and 7.9x its FY13 and FY14 consensus earnings estimates, we recommend a BUY on the stock,” says Ventura research report.   

Public holding more than 90% in Indian cos

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