ONGC
Amit shah
ONGC’s Q2FY14 performance was bettered primarily by rupee depreciation. Under-recoveries for Q2FY14 stood at `138.0bn with net crude realisation pegged at US$44.8/bbl. Crude and natural gas production remained flattish sequentially while the management indicated H2FY14E would witness higher crude production from Mumbai offshore and marginal fields. OVL performance for H1FY14 was better with start up of production from Sudan, contribution from ACG fields (Azerbaijan) and gas production from Myanmar field. Incrementally, ramp up in Sudan, Carabobo, Venezuela and Myanmar would add to overall production. OVL would be the major catalyst for ONGC apart from increase in production from its marginal fields. We have raised our FY15E rupee dollar exchange rate assumption which has resulted in higher subsidy burden for ONGC as well higher earnings (due to higher gas price realisations). Thus we maintain ‘Outperform’ with a revised price target of `355.
Rupee depreciation, higher crude prices aids revenues: Despite higher subsidy burden, ONGC’s Q2FY14 revenues jumped by 16.1% QoQ at `224.1bn owing to rupee depreciation and higher crude prices. Net realisations for the quarter stood at US$44.8/bbl (gross crude realisations at US$109.1/bbl) with discount of US$64.3/bbl. Crude and natural gas production remained flattish QoQ at 6.5mmt and 6.2bcm respectively. However crude and natural gas sales were marginally lower QoQ by 1.2% and 0.9% respectively.
Statutory levies, DDA jumps: Statutory levies were higher by 4.3% QoQ at `58.2bn on account of higher onshore production and higher realisations. DDA jumped by 47.2% YoY at `24.3bn on account of higher depletion at Mumbai offshore field, capitalization of platforms and capitalization of facilities at Aishwariya field in Rajasthan. Survey and dry wells write offs were also higher at `20.7bn for Q2FY14.
Lower yields impact other income: On a YoY basis, the yields on investments were lower and even the dividend income was lower which resulted in 12.5% YoY decline in overall other income during Q2FY14 at `9.9bn. Hence the PAT growth on a YoY basis was restricted to 2.8% at `60.6bn although it jumped by 51.0% QoQ.
Valuations remain attractive, OVL to act as catalyst: Management maintained its guidance for crude production of 27.2mmt and 28.7mmt for FY14E and FY15E and natural gas production of 25.2bcm and 26.5bcm for FY14E and FY15E respectively. During H1FY14 though crude and natural gas production stood at 13.0mmt and 12.4bcm respectively. Management expects crude production jump from its D1 offshore field as well as marginal fields thus nearing to the yearly guidance which we believe is difficult to achieve. However, we believe OVL production ramp up would be a catalyst for ONGC in medium term since production from 3 projects has started/ restarted. The stock is available at 9.1x and 7.3x FY14E and FY15E EPS of `29.6 and `36.9 respectively. Valuations continue to remain attractive and hence we maintain our ‘Outperform’ with SOTP based target price of `355.
Regards,