>ONGC (CITI)

Sell: Strong 1Q, But Can This Sharing Formula Continue?

■ Strong 1Q driven by low subsidy — 1QFY10 PAT at Rs48.5bn was above expectations, primarily on account of the lower subsidy burden driving higher net realisations and also lower other expenses. Even though gas sales recovered to 5.1bcm from the slight dip seen in 4Q09, crude sales remain depressed at 5.45MMT vs. FY09 average sales of 5.72MMT. Dry well expense declined from Rs18.6bn in 4Q09 to Rs10.7bn in 1QFY10, but remains high on a yoy basis (Rs5.5bn) due to a structural increase in costs and higher exploration intensity.

■ Subsidy sharing only on auto fuels — ONGC’s subsidy burden of Rs4.29bn was in-line with the oil ministry’s assertion of upstream sharing for under-recoveries only on auto-fuels. This burden translates into a subsidy discount of US$2.3/bbl, resulting in healthy net realisations on own crude of US$60.6/bbl. While the government has followed up intent with action, it is difficult to extrapolate this for the full year.

■ Government policy continues to be a risk — Even though Petmin has stuck to upstream sharing losses only on auto-fuels in 1Q, the Budget did not make requisite allocations to confirm that. Given that net under-recovery of Rs200bn (gross loss on LPG/SKO of Rs300bn minus oil bonds of Rs100bn) will be too much for the OMCs to bear (esp. when GRMs are likely to stay depressed), we see the risk on ONGC sharing the LPG/SKO subsidy as well is very much intact.

■ Maintain Sell, lacks triggers — ONGC currently trades at 12x Sept-10E P/E, the top end of its historical 7-12x trading band. Any move by the government to fully deregulate auto fuels could take time as it has recently constituted an expert committee for pricing recos. We maintain our Sell (3M) rating.

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