Friday, February 10, 2012

>ONGC: Uncertainty on subsidy sharing prevails

As expected ONGC reported a weak set of numbers in Q3FY12 owing to higher than expected subsidy burden of Rs125bn (about 38% sharing for upstream during 9MFY12). Operationally however, crude and natural gas production was largely in line. Earnings got boosted due to reversal of Rs31bn royalty payment from Cairn for the period August 2009 till September 2012. We believe there is still concern over ad-hoc subsidy sharing for upstream which we assume will be higher at 44.5% for FY12E.

 Revenues decline due to higher subsidy outgo: ONGC reported Rs185.1bn in revenues, a decline of 11.0% YoY and 19.2% QoQ due to the higher subsidy burden. However, this included the component of entitlement for Royalty paid for Cairn of Rs6.2bn.

 Crude production marginally down QoQ; gas production flattish: Crude production declined marginally from 6.04mmt in Q2 to 5.96mmt in Q3 while natural gas production remained fattish at 5.86bcm. Although crude production is likely to remain flattish in near term, gas production could move up with incremental production from marginal fields. Due to higher subsidy burden the net realisation for Q3 declined to US$45.0/bbl from US$83.7/bbl in Q2.

 DDA jumps, one time payment from Cairn supports bottom line: Dry wells write offs jumped from Rs11.8bn to Rs20.5bn sequentially. Depletion also increased from Rs15.0bn to Rs18.3bn due to expenditure on platforms for marginal fields. ONGC paid Rs125bn subsidies for the quarter thus impacting the bottom line. Conversely, it received Rs31.4bn payment from Cairn for the royalty paid from August 2009 to September 2012 which partially offset the impact of higher subsidy burden. Thus, the company reported PAT of Rs67.4bn against PAT of Rs47.4bn adjusted for Cairn payment.

 Subsidy sharing uncertain, operational issues at OVL: Upstream subsidy burden for 9MFY12 has been pegged at 38% while for FY12E this would increase to over 44.5% due to higher quantum of under-recoveries (our estimate of Rs1,340bn for FY12E) which is likely to be a concern for the time being. Also, the management indicated that it was facing some production issues in Sudan and Syria which could hurt OVL performance. Imperial Energy crude production is also not moving up and has been stable at about 14,000- 15,000bpd. However, the company could get some respite from Venezuelan crude production which is likely to start from December 2012 with an initial rate of about 20,000bpd, reaching a plateau at 400,000bpd by 2016. We believe the uncertainty over subsidy sharing will remain a key concern for the time being. Despite marginally toning down our estimates for FY13E, we estimate an upside of 13% from current levels and hence maintain ‘Buy’ rating on the stock with a target price of Rs319 (earlier Rs327).