ONGC - Upbeat domestic crude production guidance; OVL to play a major role in FY14E - Centrum

During Q3FY13 ONGC's crude and natural gas production largely remained flattish on a QoQ basis at 6.6mmt and 6.3bcm respectively. The company offered a discount of US$62.2/bbl to refiners grossing net realisation of US$48.0/bbl. Subsidy sharing of upstream during Q3 was restricted to 38.4% of the total under-recoveries which led to ONGC's share at Rs124.3bn (82.4% of the total upstream sharing). OVL's Carabobo asset in Venezuela started crude production in December 2012 which will be scaled up subsequently. Apart from news flows on diesel and natural gas price hikes, development on OVL front will be the key catalyst to watch out for in the next one year. We believe these developments will be favourable for ONGC and hence maintain 'Buy' rating on the stock.

Revenue jump due to higher volumes and realisations: ONGC's Q3 revenues jumped by 6.1% QoQ and 13.9% YoY at Rs210.9bn on the back of 3.0% QoQ jump in crude sales and 2.5% QoQ jump in net realisations.

Net realisations improve sequentially: ONGC's crude and natural gas production remained flattish QoQ at 6.6mmt and 6.3bcm respectively. Net realisations however were up 2.5% QoQ and 7.3% YoY at US$48.0/bbl thus benefitting the performance.

DDA increases: Capitalisation of new projects led to higher depletion that led to 18.3% QoQ rise in DDA at Rs44.1bn. Subsidy burden remained flattish QoQ at Rs124.3bn. Other income was lower sequentially as during Q2FY13 ONGC received dividend income from its investments while in Q3FY12, the company had a receipt of Rs31,420mn owing to write back of royalty from Cairn. Hence, even though the operating performance was better in Q3, ONGC reported 5.7% QoQ and 17.5% YoY decline in reported PAT at Rs55.6 (YoY jump of 20.0% adjusted for receipt from Cairn).

Upbeat production guidance; news flows on OVL to be watched out for: Management has indicated crude production guidance of 29.1mmt for FY14E (FY13E crude production estimated at about 26.2-3mmt) which is quite optimistic. The production increase is expected from marginal fields in the western region. However, OVL is likely to be the game changer for ONGC as significant production ramp up is likely from OVL owing to production increase from existing assets and additional production from recently acquired assets. Hence, news flows on OVL needs to be monitored over the next one year apart from domestic news flows on diesel and natural gas price hikes. Based on the update on ONGC and OVL's production, we have revised our estimates and raised our SOTP based target price from Rs339 to Rs365 and maintain 'Buy' rating on the stock.

Source : Equity Bulls

Keywords