ONGC: Buy at CMP 283.85
ONGC recently declared its Q1FY13 results and HDFC Securities presents an update on the same.
Q1FY13 Standalone results review
- The net sales for Q1FY13 at Rs200.8 bn were up 24.0% on a YoY basis and 6.7% on a QoQ basis. The gross realizations for the quarter stood at USD109.9 per bbl while that for Q1FY12 was USD121.3 per bbl. Net realizations were at USD46.6 per bbl vs USD48.8 per bbl in Q1FY12 and USD44.3 in Q4FY12. Subsidy discount for the quarter stood at USD63.3 per bbl vs USD72.5 per bbl in Q1FY12 and USD77.3 in Q4FY12. For the quarter the share of subsidies by ONGC was Rs123.5 bn vs Rs120.5 bn in Q1FY12 and Rs141.7 bn in Q4FY12. A weaker rupee also aided profitability due to higher realizations on gas.
- The total crude production for the quarter was down 3.3% YoY to 6.5 MMT. Of this, the share of production from the JV fields stood at 0.9 MMT which was up 8.4% YoY. ONGC’s crude production was down 4.9% YoY to 5.6 MMT. The gas production for the quarter was up 4.1% YoY to 6.4 BCM for the quarter caused by a 5.7% (YoY) rise in ONGC’s production of gas to 5.9 BCM. The share of production from the JVs however was down 12.5% to 0.5 BCM. The total value added product (VAP) production for the quarter was up 1.8% YoY to 733 TMT for the quarter
- The total crude sales for the quarter stood at 5.9 MMT for the quarter vs 5.7 MMT in Q1FY12 and 5.9 in Q4FY12. Of this, the share of production from the JV fields stood at 1.1 MMT in the quarter vs 0.7 MMT in Q1FY12 and 1.1 MMT in Q4FY12. ONGC’s crude sales stood at 4.8 MMT vs 5.0 MMT in Q1FY12 and 4.8 MMT in Q4FY12. Total gas sales for the quarter stood at 5.1 BCM vs. 4.9 BCM in Q1FY12 and 5.2 BCM in Q4FY12. ONGC’s gas sale stood at 4.7 BCM vs 4.4 BCM in Q1FY12 and 4.8 BCM in Q4FY12. Total value added product (VAP) sales for the quarter was up 2.6% YoY to 714 TMT for the quarter
- The royalty for the quarter stood at 8.3% vs 11.4% in FY12 as ONGC overpaid royalty in Q4FY12 due to lower net realizations in Q4 after finalization of subsidy discount
- For Q1FY13 the Rs/USD rate stood at Rs54.22 per USD as against Rs44.74 per USD in Q1FY12, Rs50.29 per USD in Q4FY12 and Rs47.95 per USD in FY12. The sharp Rupee depreciation boosted revenue in the quarter, offsetting lower realizations
- Operating margins fell from 57.4% in Q1FY12 and 59.9% in Q4FY12 to 55.2% in Q1FY13. Statutory levies increased significantly from 22.9% of sales in Q1FY12 and 22.6% of sales in Q4FY12 to 26.1% of sales in Q1FY13. This is largely on account of increase in cess from ~Rs2,625/barrel to Rs4,500/barrel in FY13 budget
- DD&A expense fell 22.4% YoY and 34.8% QoQ largely on account of lower exploration cost written off. Exploration cost written off decreased substantially from Rs22.9 bn in Q1FY12 and Rs35.6 bn in Q4FY12 to Rs12.0 bn in Q1FY13
- Share of upstream companies in total under-recoveries fell to 31.5% in Q1FY13 from 34.3% in Q1FY12 and 43.9% in Q4FY12. ONGC’s subsidy share among upstream companies stood at 82.0% vs 80.8% in FY12. This inflated the share of subsidy amount YoY to Rs123.5 bn. Therefore the net crude realizations of ONGC fell 4.5% YoY to USD46.6 per barrel for Q1FY13
- OVL’s Q1FY13 production was 1.8 mmtoe, down 23% YoY and 9% QoQ due to lower production in Sudanese (down ~81%), Syrian (down 33%) and Russian blocks. Unrest in Syria and transit fee issues between North Sudan and South Sudan led to lower production. Recent media reports indicate that North Sudan and South Sudan have agreed upon USD11/bbl crude oil transit fees (including USD8.4/bbl transportation cost, USD1.6/bbl processing cost and USD1/bbl transition cost) and production is likely to improve. While an agreement has been reached, normalization of production will still take some time
- The PAT for the quarter at Rs 60.8 bn is up 48.4% YoY and 7.7% QoQ largely on account of the lower DD&A expense. NPM was 30.3% in the quarter vs 25.3% in Q1FY12 and 30.0% in Q4FY12
ONGC commands a huge share of ~74% of the domestic crude production. ONGC’s robust infrastructure and strong capabilities in the field of exploration, production, transportation and processing have enabled it to become a leader in the oil and gas space in the country. This is also justified from the fact that ONGC has been awarded the lion’s share of explorations acreage in the NELP rounds by the government of India. ONGC has one of the largest proved reserves in India as compared to any other oil and gas company. A strong and a wide reserves base provides ONGC an abundant and stable long-term source of hydrocarbons for crude oil and natural gas production.
The revenue for the quarter at Rs200.8 bn was up 24.0% on a YoY basis and 6.7% on a QoQ basis. The rise in the top line was despite a drop in net realization from USD48.8/bbl to USD46.6/bbl. Oil sales (incl JV) and gas sales (incl JV) were higher YoY. ONGC’s subsidy discount lowered YoY and QoQ to USD63.3 per bbl.
ONGC is exposed to the subsidy sharing mechanism and hence incurs a substantial cash outflow on account of the same. At the end of FY12, the subsidy burden stood at ~39.7% (share of subsidy to be borne by the upstream companies), while that in Q1FY13 was 31.5% as compared to 34.3% in Q1FY12 and 43.9% in Q4FY12. The share of ONGC in the upstream subsidies was 80.8% vs 82.0% in FY12. Another major aspect, which could inflate the concerns of ONGC, is the political unrest in the Syria and Sudan, which account for 25% of the OVL’s production. While media reports claim the countries have settled their domestic issues, the recovery of production to normal levels could take some time. Royalty and write-off of DD&A could go upin the subsequent quarters of FY13.
However the positives for ONGC could be the normalization of the subsidy burden and the likely reserve accretion from the large exploration and production accerage with ONGC. Further hike in the administered prices of gas could be a major upside for ONGC but the timing of this is uncertain. ONGC has guided for crude production of 27.5 MMT (including JV share) and natural gas production of 25.7 BCM (including JV share) for FY13. This provides comfort on the production side for the near future. ONGC also made a recent discovery in the Mumbai High region, which is expected to increase domestic production significantly. However, the discovery is very recent and recoverability needs to be further substantiated.
Though the volume rise in FY13 could be muted, as per the provisional guidance, volumes in FY14 could see a bigger jump. ONGC is emerging from a long period of stagnant production and could see organic production growth, visibility of which improves with this discovery.
HDFC Securities awaits the annual report for FY12 (post which they will attempt to value the stock on EV/BoE) and till then they continue to value the stock on P/E basis. HDFC Securities is maintaining their FY13E topline estimate but are revising downward, profits at the operating and net level.
HDFC Securities had issued a Result update on ONGC dated 12th June 2012 at a CMP of Rs255.8. In their report they had stated that the stock price could remain in the range of Rs235-290 for the quarter. Post that the stock price touched a low of Rs254.65 on 12th June 2012 itself and a high of Rs292.55 on 3rd July 2012.
HDFC Securities recommends buying the stock in the Rs269-276 (9-9.25x FY13E EPS) band for targets of Rs298 (10x FY13E EPS) and Rs313 (10.5x FY13E EPS).
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