ONGC - Earnings remain intact as changing variables offset potential rise in subsidy burden - Antique

With rupee depreciation, under-recoveries have started to rise and markets are concerned about potential rise in burden on upstream companies as Finance Minister had commented that FY14e upstream burden is expected to remain constant YoY at INR600bn. We note that despite a 32% fall in FY14e gross u/r to INR1092bn and assuming flat upstream subsidy burden, Oil & Natural Gas Corporation Limited's (ONGC) earnings are still expected to grow 14% YoY and beat consensus by 3%. This is largely driven by benefit of rupee depreciation on crude net realisation (INR realisation down only 1% vs. 4% fall in USD realisation), USD revenues from VAP, USD revenues from gas and an expected increase in APM gas price to USD6.7/mmbtu assumed from 2HFY14. Reiterate BUY.

Changes in rupee assumption to offset higher subsidy burden

Despite a 32% expected reduction in FY14e under-recoveries, there are echoes that upstream subsidy burden, instead of coming down may remain constant YoY at INR600bn. Finance Minister had also indicated the same, which we believe concerned the markets. Our sensitivity analysis on depreciating rupee with constant upstream subsidy burden assuming APM gas price hike to USD6.7/mmbtu effective 1st October 2013, suggests that ONGC's FY14e earnings are likely to remain unchanged from our earlier estimate of INR35/sh up 14% YoY and 3% higher than consensus. Further, INR1/USD depreciation has positive impact of INR1.8/sh to ONGC's Consol EPS assuming flat subsidy burden.

We were never so close to gas price hike

We expect Govt. decision on natural gas price revision soon as has been indicated by Oil Minister as well as Finance Minister with the former recommending a USD6.78/mmbtu price for all domestic gas. Oil Minister Sh. Veerappa Moily also indicated that APM gas price hike would take effect immediately while RIL's KG-D6 gas price would be revised effective from April 2014. We have currently built a gas price hike to USD6/mmbtu from FY15e for ONGC: Any price hike prior to this will be positive for FY14 earnings as highlighted above. For every USD1/mmbtu revision in gas prices, ONGC's EPS change by INR3/sh.

Production growth targeted from marginal fields

ONGC has guided for a 2mmt increase in standalone oil production in FY14e/FY15e from the development of 37 marginal fields implying ~10% standalone production growth in FY14e / FY15e which would be a sharp reversal to an otherwise negative production CAGR of 3% during FY08-13. Development of these fields would accrue 40mmt of oil and 64bcm of gas to ONGC. We nevertheless assume a conservative production growth of 3-4% up to FY15e. OVL is also expected to witness increase in production to 8.2mmtoe in FY14e as per management guidance.

Reiterate BUY with INR375 target price

We are maintaining our FY14e assumptions on rupee (INR54.5/USD), ONGC's subsidy burden (INR406bn), gas price (USD4.2) and INR35.2/sh Consol EPS. We note that any change in these assumptions has no impact on ONGC's FY14e earnings as rupee depreciation and gas price hike offsets potential rise in subsidy burden. We reiterate BUY on ONGC with a target price of INR375/sh valuing ONGC's core business at 9x FY15e EPS of INR40/sh and listed investments at INR14/sh.

Source : Equity Bulls

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