The ONGC stock, which has managed to do a little better than the broader markets, post the good results last Tuesday, may face difficulty in sustaining this performance. ONGC surprised the markets with better-than-expected set of numbers for the March 2012 quarter, thanks to a lower-than-expected share in subsidy, which improved its net realisations and boosted profits. However, concerns have risen with declining domestic oil production from ONGC’s mature oil wells.
Production is likely to dip further in FY13 despite good reserve ratios, which will accrue benefits in the longer run. Oil production from its international subsidiary, ONGC Videsh Ltd (OVL), is also under pressure as geo-political problems in Syria and Sudan persist. These concerns have led analysts to cut their earnings estimates for the company for FY13 and FY14. For instance, analysts at BRICS Securities have lowered their FY13 and FY14 earnings estimates by 14 per cent and 21 per cent, respectively, on account of lower oil production from the nominated blocks and OVL.
Apart from the high reserve accretion, what also stands in ONGC’s favour is valuation. The stock, at Rs 254 levels, is trading at a PE of about eight times, which is near the lower end of its historical band of 7-12. These should provide support on the downside.
| EARNINGS UNDER STRESS | |||
| In Rs crore | FY12 | FY13E | FY14E |
| Net sales | 1,47,307 | 1,57,689 | 1,65,250 |
| % change y-o-y | 20.8 | 7.7 | 4.8 |
| Ebitda | 48,184 | 58,735 | 61,430 |
| Ebitda (%) | 32.7 | 37.3 | 37.2 |
| Net profit | 28,144 | 26,344 | 27,685 |
| % change y-o-y | 25.3 | -6.4 | 5.1 |
| EPS (Rs) | 32.9 | 30.8 | 32.5 |
| PE (x) | 7.7 | 8.2 | 7.8 |
| Consolidated financials Source: BSE, Bloomberg | |||
Lower production forecast
A decline in crude oil production from domestic fields has been observed during the three months and full year ended March 2012. Crude oil production declined to 5.78 million metric tonnes (MMT) in the March 2012 quarter from 5.96 MMT in the December 2011 quarter, while output at its joint ventures inched up from 0.78 MMT to 0.81 MMT owing to higher production by Cairn India. For FY12, too, crude oil production from ONGC’s domestic fields stood at 26.9 MMT, down 1.3 per cent over FY11. Even though ONGC has guided for FY13 domestic oil production of 27.54 MMT, most analysts don’t see the company achieving the target. Analysts at Asian Market Securities attribute this to lower production from mature oil fields.
Due to the decline in output from mature fields, analysts at BRICS have again lowered their production estimates from ONGC’s nomination blocks for FY13 and FY14 by eight per cent and 10 per cent over their earlier estimates to 24 MMT and 24.5 MMT, respectively. They have also lowered their OVL production estimates for FY13 and FY14 to six MMT each, a reduction of 20 per cent and 30 per cent for both years, factoring in geopolitical problems in Sudan and Syria. Even ONGC’s management, at the recently held analysts’ meet, had expressed concerns over OVL’s production and expects production in Sudan to be impacted in FY13.
Positively, ONGC reported an ultimate reserve accretion of 84.13 MMT of oil equivalent (the highest ever in two decades, say Morgan Stanley analysts) with an impressive reserve replacement ratio of 1.79 in FY12 compared to 1.76 in FY11 aided by 23 exploration discoveries. This is a huge positive and would benefit ONGC’s oil production, albeit in the longer term.
Uncertainty on subsidy sharing
Subsidy sharing for upstream companies (oil and gas producers) came at 39.7 per cent (Rs 55,000 crore) for FY12. Of this, ONGC shared Rs 44,465.6 crore, lower than analysts’ expectations, which boosted its net crude oil realisations. However, in FY13, looking at the rupee depreciation, the overall subsidies are likely to increase. Analysts at Morgan Stanley estimate overall subsidies to touch Rs 1,62,000 crore (FY12 subsidies were about Rs 1,38,500 crore). Even if ONGC’s share in the overall subsidy burden remains the same as in FY12, Morgan Stanley’s analysts estimate net realisations to fall to $58 a barrel from their earlier estimate of $60 a barrel, implying a decline of five to seven per cent to their estimates.
For now, given the ad-hoc sharing mechanism and that the final burden typically becomes clearer at the end of any fiscal year, analysts expect it to result in volatility in quarterly earnings.
Gas output: A positive trend
Some respite to ONGC, though, comes from higher gas production, which increased four per cent year-on-year during the March 2012 quarter to 6.03 billion cubic metres (BCM). Natural gas production in FY12 stood at 25.5 BCM. Mayur Matani at ICICI Securities expects gas production from domestic fields to reach 28.4 BCM by FY14, implying a compounded annual growth rate of 5.5 per cent in FY12-14. Growth in output is expected to come from joint ventures and new as well as marginal fields.
Outlook
With the revision in earnings estimates due to lower domestic oil production, lower output from OVL and fall in net realisations due to higher subsidies, analysts have tweaked their one-year target prices too, which currently range between Rs 280-300. However, they add that any decision on fuel price hikes by the government can provide some upside to their estimates.
