Maintain Buy on ONGC - Motilal Oswal

ONGC: Announces 2 onland oil and gas discoveries; likely favorable policy changes positive for the stock; Maintain Buy

ONGC has announced 2 discoveries in its nomination blocks at KG onland and Cambay basin. It encountered gas in the KG onshore block, while oil was found in Cambay block.

The two discoveries announced by ONGC are 1) Vygreswaram Southwest-1 and Limbodra East-1. The first discovery seems to be highly prospective given the 30m gas column and the block being near the established Krishna Godavari basin. The second discovery though has a small column of 11m is positive as it has opened the new play within the region which will lead to further discoveries in the area.

Two-pronged exploration strategy adopted by ONGC: Management attributes its exploration success to its 2-pronged strategy of targeting deeper as well as shallower targets in operational areas in different basins. This strategy has been quite successful with significant discoveries in KG onland blocks (added 18.5mmtoe in-place resources) and in its Assam blocks. While in the western onland basin it has added 23mmtoe and in KG offshore it has added 89mmtoe of in-place resources.

Increased exploration focus seems to be paying off for ONGC: As against 21 and 28 discoveries in FY10 and FY09, in FY11 it has already made 10 discoveries. It plans to drill 154 exploratory wells in FY11 (v/s 128 in FY10 and 106 in FY09) of which 15 will be in deepwater area and 33 in shallow water area, while the rest will be onland exploration wells.

Unlike other global E&P players that reduce their exploration and development capex in a low oil price regime, ONGC has maintained its capex momentum. For the Eleventh Plan, ONGC has earmarked capex of Rs1,300b, 47% increase over the actual Tenth Plan capex. In the first three years of the Plan (FY08-10), ONGC (including OVL) has already spent 67% of the funds earmarked and actual capex is set to be higher than the planned capex.

Triggers: 1) Clarity on subsidy sharing; 2) Hike in APM gas prices for non-core sectors; 3) Ramp up of volumes of Imperial energy and 4) Approval of DoC for its KG and Mahanadi blocks.

Valuation and View: We remain positive on ONGC due to likely rationalization of subsidy sharing and potential reserve accretion from its large E&P acreage. Stock trades at 10.9x FY12E EPS of Rs131. Maintain Buy.

Source : Equity Bulls

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