Accumulate ONGC - Production woes continue, OVL view hazy - Elara Capital

• ONGC
• Rating : Accumulate
• Target Price : INR1,335
• Upside : 7%
• CMP : INR1,242 (as on 30 July 2010)

Production woes continue, OVL view hazy

Domestic production decline continues, FY11 guidance too high

ONGC reported its Q1FY11 results with revenue of INR136.6bn vs our estimate of INR140.9bn. Subsidy payout was INR55.1bn vs our estimate of INR52bn. As a result, the net realization for Q1 was USD48/bbl vs. our estimate of USD51/bbl. ONGC performed well operationally with EBITDA margins of 59% vs our estimate of 55%. Unlike in the previous two quarters, the DDA charge was lower due to lower charging of the dry wells. ONGC's domestic production continued to decline with total crude production coming in at 6.55MMT vs 6.65MMT in Q4FY10. There was a decline despite the JV production being higher implying further decline in the Mumbai High production levels. The Mumbai High fields, the biggest contributor to ONGC's domestic production, continues to decline which raises questions over the high production targets that ONGC has set for itself in FY11 and FY12.

OVL outlook still hazy, ramp-up at Imperial a huge challenge

OVL produced 2.3MMT of oil and gas in Q1FY11 while the annual target is 8.6MMT. Imperial Energy production is still only at 17kbpd and is unlikely to rise very fast as ONGC is facing technical issues in extracting the reserves. When ONGC had acquired Imperial Energy, the production was expected to ramp-up to 85kbpd in 2009, while currently production is 80% below target despite a year's delay. Moreover, the management's outlook on the ramp-up seems vague raising doubts over OVL's ability to reach high production levels.

Valuation-driven 8-10% potential upside, fundamental issues persist

We believe the stock still has an upside of 8-10%, as the upstream PSUs narrow down their historical 20-25% valuation discount to global E&P peers to roughly 10%. However, we do not see any strong positive for ONGC beyond this upside as fundamental problems would make investors wary, in our view. We maintain our Accumulate rating on the stock and TP of INR1,335/sh.

Source : Equity Bulls

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