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Research
ONGC - Re-rating ahead on higher expected realisations; BUY - Religare
Posted On : 2014-03-09 10:22:09( TIMEZONE : IST )
ONGC's current valuations price in concerns of higher U/R, but not the likely earnings gains from improvement in crude and NG realisations. With continued diesel price reform and the Govt. taking cognizance that ONGC needs higher crude realisations to meet rising opex/capex, we model for FY15/FY16 realisations of US$ 55/60 per barrel (from US$ 53/55 earlier). Further, post CCEA approval, we model gas realisations of US$ 6/mmbtu Apr'14 onwards. Reiterate BUY with a new Mar'16 TP of Rs 380 (from Rs 350)
- Likely improvement in realisations not priced in: ONGC's crude realisation is likely to improve led by (a) lower estimated U/R in FY15/FY16 at Rs 1,133bn/Rs 1086bn; (b) budgetary considerations given the high contribution of the Oil & Gas sector to the exchequer which remains in excess of the Govt's cash subsidy (for every US$ 10/bbl increase in upstream realisation, US$ 7/bbl flows back to the Govt.); and (c) as rising opex/capex warrant better realisations (the Govt. has already taken cognizance of this and circulated a Cabinet note proposing realisations of US$ 65/bbl for ONGC).
- Production to improve on addition of marginal fields: ONGC has successfully integrated 5 of 36 marginal fields (to contribute ~4.6mmscmd of NG plus 29kbpd of crude) and will add more marginal fields ahead. Development of KG-98/2 is on track (DoC submitted to DGH, FDP by CY14-end) and production is likely by FY17-FY18.
- Royalty payouts to Gujarat govt. a key risk: The Supreme Court has directed ONGC to pay royalty to the Gujarat govt. on crude produced in the state at market price instead of price post-subsidy, till a final decision is taken. We conservatively factor in royalty payment at gross price for ONGC's entire on-shore production.
- Maintain BUY, revised TP of Rs 380: ONGC is trading at a P/E of 6x FY16E, which does not factor in EPS gains from a likely improvement in crude/NG realisations. We thus expect a re-rating ahead – reiterate BUY.
