ONGC - Standalone production growth to revive - IIFL

Majority of ONGC's producing assets are mature and are witnessing natural declines. Resultantly, ONGC's crude oil production volume has declined from 25.95mn tons in FY08 to 23.71mn tons in FY12. However, during this period, the company has seen a consistent trend of reserve-replacement ratio of greater than 1 leading to sustained increase in reserve base. We note that many of its projects are nearing completion and its JV production will continue to rise on back of rising production at Cairn's Rajasthan asset. This will result in a revival in overall standalone production rates.

OVL production to stage a comeback

Due to the geopolitical tensions in Sudan and Syria, OVL production saw steep decline in FY13. While the production at these fields might remain stunted, OVL over the medium term will add new blocks to production. Its newly acquired assets in Azerbaijan and Kazakhstan are prolific in reserves.

Key beneficiary of gas price hike

ONGC has been selling the gas produced from the nominated blocks at administered price of US$4.2/mmbtu, much lower when compared to other blocks such as Panna-Mukta-Tapti and imported LNG. For power and fertiliser players in the North-East, ONGC earns only US$2.5/mmbtu. With a view to move the gas pricing closer to market-determined levels, the government is considering to raise prices to US$8/mmbtu. Every US$1/mmtbu increase in gas prices would translate into 7% increase in FY14E EPS for ONGC.

To benefit majorly from the subsidy pruning steps

Recent government measures will result in steep fall in under recoveries for FY14. If the upstream contribution is maintained at current levels, ONGC share of under recoveries will reduce from Rs540bn in FY13 to Rs361bn in FY14. Crude oil net realizations will improve from US$51.6/bbl to US$64.4/bbl during the same period. Every US$1/bbl improvement in net realizations can improve ONGC's FY14E EPS by 2%. The stock has been trading at a steep discount to global peers owing to the subsidy burden. However, we believe it should narrow down owing to the reforms.

Source : Equity Bulls

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