)
The scrip of Oil and Natural Gas Corp Ltd (ONGC), which has outperformed the broader indices in 2013 so far, has seen some weakness over the last few days, mainly due to a weaker rupee (which is likely to result in higher subsidy burden). However, analysts believe these are near-term pressures, which provide an opportunity to buy.
ONGC is set to gain from fuel price reforms such as diesel price hikes and higher domestic gas prices, going forward. The state-run company’s production volumes are also likely to pick up over the next couple of years due to ramp up in production at Rajasthan block, higher output from own fields and a pick up in ONGC Videsh Ltd (OVL)'s production (due to incremental volumes at fields in South Sudan and Myanmar). The key risk, though, remains a sudden and unfavourable change in the subsidy sharing arrangement.
On Monday, ONGC announced that OVL, its overseas arm, along with Oil India Ltd (OIL), plans to buy Videocon Industries' 10 per cent stake in Area 1, Rovuma Basin, Mozambique for $2.47 billion. According to the statement, OVL would hold 60 per cent in the special purpose vehicle that buys the stake, while OIL would hold 40 per cent. Though ONGC withdrew this media release saying it was inadvertently issued, reports suggest the deal could be announced later this week. Deal valuations (based on statement withdrawn) are broadly in line with expectations. Assuming it goes through, analysts say the immediate impact on ONGC and OIL’s stocks could be limited.
"We expect OVL and OIL to raise dollar loans for financing this stake purchase. We assume 20 per cent value erosion for ONGC and OIL transaction value implying a per share impact of Rs 1.9 for ONGC and Rs 18 for OIL. This still leaves 16 per cent and 20 per cent upside, respectively, based on our target price of Rs 375 and Rs 700," says Amit Rustagi, oil and gas analyst at Antique Stock Broking. Notably, other stakeholders in the Mozambique block, namely Anadarko and ENH, are also planning to exit. Any premium valuation paid by the buyers will be a positive for ONGC.
From a longer-term perspective, the gains are immense. Anadarko had said liquefied natural gas (LNG) production will commence in 2018, reach the peak level of of 50 million tonnes per annum by 2030 and remain at near plateau till 2044. Analysts estimate the recoverable reserves of 50 trillion cubic feet (TCF) from Mozambique versus Anadarko's estimate of 35-65 TCF plus. Total development capital expenditure is estimated at $16 billion by 2018. This will add to OVL’s revenues, which stood at Rs 18,000 crore for FY13 or about 11 per cent of ONGC's consolidated revenues.
Meanwhile, on the domestic front, a weakening rupee could wipe out the benefits of diesel price hikes and lower crude oil prices for ONGC. Every one rupee depreciation against the US Dollar increases the total annual under-recovery by about Rs 9,000 crore. Given that the rupee has weakened by 8.5 per cent, or Rs 4.6 since April 30, the total FY14 under-recoveries could cross Rs 1.2 lakh crore versus the earlier estimate of Rs 80,000 crore. This will push up ONGC's subsidy burden significantly in FY14; its share has hovered around 36-40 per cent in the past. However, since OVL sells at market-based prices, the same would partly offset the increase in subsidy.
Bhavesh Chauhan, senior research analyst, Angel Broking, says: "While rupee depreciation is a negative event for ONGC, the real impact will be a function of how diesel price hikes and crude oil price move. We are bullish on ONGC and expect the subsidy burden to go down in FY15." He has a target price of Rs 372 on the ONGC stock. Chauhan expects ONGC's earnings per share to grow by 22.6 per cent in FY14 to Rs 34.7 levels.
