Maintain 'buy' on ONGC - Geojit BNP Paribas Financial Services

- Price realization in 3QFY13 is a positive surprise at USD 47.97/barrel on gross realization of USD 110.2/barrel as upstream shared 40% of under-recoveries.

- The result would have been better but for higher depletion charges.

- Crude sales were better than expected but domestic field production continued to fall (5% yoy). Gas production is up 1%.

- Investors' interest on ONGC is likely to continue because of the possible APM (administered price mechanism) gas price hike. Discussions are going on for this.

- However, crude production growth is likely to be a challenge given Cairn India's delays in ramp up in Rajasthan.

- Also, a production stoppage at Sudan and struggles at Imperial will dampen the production outlook from ONGC Videsh (OVL).

- The company's share price has rallied on possible deregulation of diesel prices and APM gas price hike.

- It is expected that a gas price hike of USD 8/barrel would result in an immediate upside of 22% to FY14 expected EPS.

- In the long run, it could increase gas production as prospective marginal fields may again become viable.

- If the diesel price hike is implemented in a systematic manner, company's crude realization in FY14 may increase from the current level of USD 51/barrel to USD 60-65/barrel, as subsidy contributions steadily decline.

- Downside risk to the rating are higher than expected subsidy burden and OVL related write -offs (Sudan, Syria, Imperial)

Source : Equity Bulls

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