ONGC’s inexpensive valuations, a likely improvement in earnings from rupee depreciation and reduced royalty burden in the Rajasthan block make it an ideal candidate for investment
ONGC continues to remain a healthy investment candidate for the long-term given its inexpensive valuation and likely improvement in earnings from rupee depreciation and reduced royalty burden in Rajasthan block. If the first half of FY12 was any indication, the company’s subsidy burden, is likely to remain low. Its heavy capex plans, besides the dividend yield of 3.4%, protect its stock price from downside risks. ONGC’s subsidy burden, which stayed at 27-28% of the total industry’s under-recoveries, spiked suddenly to 31.5% in FY11. However, in the first half of FY12, the burden has again fallen to 27.3%. This has allowed the company to earn a part of the benefit of rising oil prices. The company’s net realised price of crude oil stood at $66.52 a barrel for the first half of FY12, around 19.4% higher than corresponding period of last year, making it one of the best periods for ONGC.
The production from Mangala field in Rajasthan has enabled ONGC to show a marginal improvement in its domestic crude oil production after years of stagnation. The oil production for the first half of FY12 was up 1.1% at 13.6 million tonne (MT). The production had come down from 27.94 MT in FY08 to 26.58 MT in FY10, which inched up to 27.26 MT in FY11.
The production of ONGC’s wholly-owned subsidiary ONGC Videsh (OVL) is also scaling up in spite of the problems faced by its subsidiary Imperial Energy in Russia. OVL has nine producing assets apart from three development blocks, two discovery blocks and 18 exploration blocks across seven countries. Its production grew 6.5% in FY11 to 9.44 MT of oil equivalent. Its net profit too jumped 29% to 2,691 crore for FY11. Three more blocks — A1 and A3 in Myanmar and Carabobo in Venezuela — are expected to start production in 2013. ONGC is implementing a number of projects to improve oil production from its current fields that will be completed in 2012 and 2013. In addition, it is also working on a number of new blocks. Its capex plan envisages spending 31,150 crore on revamping and modernising existing fields and infrastructure, with additional 24,500 crore on developing new fields.
In the past five years the company has consistently maintained a reserve replacement ratio above 1. In other words, its recoverable reserves are growing faster than its current production level. This gives visibility to its future growth.
ONGC’s joint ventures are set to complete two mega-projects in downstream industries in 2012 - aromatics complex at Mangalore and a 725 MW gas-based power plant at Tripura. In 2013, its 1.4 million tonne petrochemical complex in Dahej under ONGC Petro-additions (OPaL) will be commissioned.
The production from Mangala field in Rajasthan has enabled ONGC to show a marginal improvement in its domestic crude oil production after years of stagnation. The oil production for the first half of FY12 was up 1.1% at 13.6 million tonne (MT). The production had come down from 27.94 MT in FY08 to 26.58 MT in FY10, which inched up to 27.26 MT in FY11.
The production of ONGC’s wholly-owned subsidiary ONGC Videsh (OVL) is also scaling up in spite of the problems faced by its subsidiary Imperial Energy in Russia. OVL has nine producing assets apart from three development blocks, two discovery blocks and 18 exploration blocks across seven countries. Its production grew 6.5% in FY11 to 9.44 MT of oil equivalent. Its net profit too jumped 29% to 2,691 crore for FY11. Three more blocks — A1 and A3 in Myanmar and Carabobo in Venezuela — are expected to start production in 2013. ONGC is implementing a number of projects to improve oil production from its current fields that will be completed in 2012 and 2013. In addition, it is also working on a number of new blocks. Its capex plan envisages spending 31,150 crore on revamping and modernising existing fields and infrastructure, with additional 24,500 crore on developing new fields.
In the past five years the company has consistently maintained a reserve replacement ratio above 1. In other words, its recoverable reserves are growing faster than its current production level. This gives visibility to its future growth.
ONGC’s joint ventures are set to complete two mega-projects in downstream industries in 2012 - aromatics complex at Mangalore and a 725 MW gas-based power plant at Tripura. In 2013, its 1.4 million tonne petrochemical complex in Dahej under ONGC Petro-additions (OPaL) will be commissioned.
FINANCIALS In the first half of FY12, ONGC’s net profit grew 40.7% to 12,737 crore on a benign subsidy burden. The company remains cash rich with bank balance exceeding 27,440 crore by end September 2011. Although reducing over the past few years, ONGC’s return on employed capital (RoCE) remained above 25% for FY11.
VALUATIONS ONGC is currently trading at a P/E around 10 on a standalone basis. Adjusting for OVL’s numbers, the valuation stands at 8.6. Its peers Cairn India and Oil India are trading at P/E of 6.5 and 8.1, respectively. Still, ONGC’s dividend yield is highest among the lot at 3.4%.
CONCERNS Rising under-recoveries in the petroleum sector poses a risk to ONGC’s burden of subsidy particularly because the government continues to defer from making this a formula-based transparent system. The company’s long-awaited FPO also has had a lasting depressing impact on the scrip’s movement. This may continue to linger on for a while.
The company’s recoverable reserves are growing faster than its current production level. This gives visibility to its future growth
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