>ONGC: Targeting to raise production 2x and market cap 4x by 2030

In its analyst meet, ONGC indicated that mature fields are declining at a faster pace of 8‐9%. Crude production costs have inched up to USD44/bbl – a point which the company may use to negotiate with government for higher FY13 realization. The Perspective Plan 2030 aims to double production implying 75% of incremental production from OVL. We are disappointed with the faster decline in maturing fields (earlier estimate at 6%) and cut our crude production forecast to 1.9% CAGR over FY13‐15E from 4.7% earlier. Thus, we lower our fair value to INR321/share.

■ Marginal fields declining at a faster rate

ONGC has indicated that production from mature fields (15 fields contributing to 80% of production) is declining at 8‐9%, faster than earlier decline rates of 6%. Production from redevelopment projects and marginal fields is expected to compensate for this, curbing the net decline rate to 1‐2%. IOR/EOR projects, so far, have added 72 mm toe to production and are expected to cumulatively add 171 mmtoe by 2030.

■ Cost of crude production inching up; net realization ought to rise

Production costs (incl. levies and taxes) have gone up from USD38/bbl to USD 44/bbl due to recent increase in cess, and will keep escalating due to higher cost of services and manpower. With net realization from nominated fields at USD55/bbl, profit is restricted at USD10/bbl. If costs grow 8% YoY, they will reach USD61/bbl in five years.

■ Targeting to raise production 2x and market cap 4x by 2030

By 2030, the company envisages to raise production 2x from 62mtoe to 130mtoe (4‐5% CAGR vs. 2% CAGR in past 56 years), revenue 3x and market cap 4x (implies 8% CAGR price appreciation). Of the 68 mtoe production increase, it expects 52 mtoe from OVL (75%), implying a spate of acquisitions ahead. OVL’s blocks in Syria and Sudan are facing disruptions, while growth in Sakhalin and Imperial is more than two years away.

■ Outlook: Lower fair value to INR321 on weak production growth

We have lowered our production forecasts, incorporating faster pace of decline from maturing fields. We estimate crude production (nominated, JVs) to post 1.9% CAGR over FY13‐15E, with maturing fields declining at 7.6% CAGR. We lower FY13E and FY14E EPS by 9% and 13% to INR30.4 and INR32.2, respectively, and value ONGC at INR321 due to INR22 reduction in ONGC standalone valuation. Maintain BUY.

RISH TRADER