We maintain our Buy rating on ONGC with a target price of R320 based on sum-of-the-parts methodology. ONGC trades at 45% discount to its global peers on EV/BOE (enterprise value/barrel of oil equivalent) [1Póprovenóbasis] and likely subsidy rationalisation remains a long-term trigger. Implied dividend yield of FY12 dividend stands at 4%. The stock trades at 9xFY13e EPS of R29.5.
Reported numbers lower than expected: ONGC reported sales of R198 billion, Ebitda of R103 bn (vs estimates of R119 bn) and net profit of R59 bn (vs R64 bn) for Q2FY13. The numbers were below expectations primarily due to lower sales, partly compensated by lower DD&A (depletion, depreciation and amortisation) at R37 bn (estimate of R40.6 bn) and higher other income at R20 bn. Net sales were impacted by lower net realisation at $46.8 per barrel due to lower gross realisation at $109.9 per barrel and higher per barrel subsidy at $63.1 per barrelóled by lower oil sales.
Implementation of new COSA impacts gross realisation: Gross realisation was impacted by the implementation of new COSA (crude oil sales agreement) with OMCs (oil marketing companies), with effect from April 2010. Second quarter numbers included prior period impact of R6.5 bn and recurring impact of R500m.
Subsidy payout of R123 bn; net realisation at $46.8 per barrel: We model upstream subsidy sharing at 40% for FY13 as H1FY13 upstream sharing was 35%, it implies H2FY13 sharing at 45%. ONGCís subsidy payout stood at R123 bn (versus R57 bn in Q2FY12 and R123 bn in Q1FY13). Its share in the overall upstream share was 82%.
Upstream sharing estimated 40% in FY13: We model upstream subsidy sharing at 40% for FY13/FY14. ONGCís Q2FY13 subsidy stood at R123 bn and its share in upstream was 81.6%. With FY13e under-recoveries at R1.5 trillion (vs R1.4 trn in FY12), it is unlikely that the government will reduce the subsidy burden on upstream companies.
DD&A to be higher in H2FY13: DD&A charge for H2 could be higher than H1, as ONGC charges well writeoffs at the year-end, when it reviews its exploration performance. ONGCís DD&A expenses for Q2FY13 were R32 bn, up 14% y-o-y and 17% q-o-q. The increase was driven by higher dry well expenses.
Production growth from FY15: ONGC expects its oil production to average 23.6 million metric tonnes oil equivalent (mmtoe) and 25.8 mmtoe in FY13 and FY14, and expect meaningful jump in FY15 driven by contribution from its IOR/EOR (improved/enhanced oil recovery) projects and additional production from the D1 field in Mumbai High. Earlier, ONGC had guided increase in D1 field production from the current 12,500 barrels per day (bpd) to 36,000 bpd by February 2013 and 60,000 bpd by January 2014.
Update on ONGC Videsh: In H1FY13, OVLís production was 3.39 mmtoe (6.7 mmtoe annualised). OVLís production is impacted by lower production in Sudan and Imperial Energy in Russia. ONGC has stopped recognising any production from Syria due to ongoing conflict in the country. OVL expects its FY13/FY14 production to average 7 mmtoe.