- Net sales fall 13% yoy driven by 1) lower crude oil production, 2) higher subsidy burden, 3) one time write offs regards to COSA with OMCs. Higher natural gas sales and VAP revenues restricted the fall
- Steep 21% rupee depreciation on yoy basis partly offsets net crude oil realization slump of 43.4% yoy to US$46.8/bbl
- Natural gas realization was at Rs8,655/tscm as compared to Rs6,871/tscm in Q2 FY12
- For Q2 FY13 upstream contribution towards under recoveries is at 40.2% and ONGC share among upstream companies is at 81%
- We downgrade our rating to MP from BUY recommendation with a 9-month target price of Rs290
|(Rs m)||Q2 FY13||Q2 FY12||% yoy||Q1 FY13||% qoq|
|Effective tax rate (%)||30.9||29.8||32.0|
|Adj. PAT margin (%)||29.7||37.7||(804)bps||30.1||(47)bps|
|Ann. EPS (Rs)||27.6||40.4||(31.8)||28.4||(3.0)|
Net sales lower than expectations, falls 13% yoy
Oil and Natural Corporation Ltd (ONGC) reported 13.3% yoy fall in net sales to Rs199bn (including income from operations). Crude oil production was down 4.6% yoy as 13.6% yoy increase in JV production was more than offset by 7% decline in production from nominated blocks. Gas production remained flat. Crude oil revenues slumped 23.3% yoy and 5.1% qoq driven by sharp 40% yoy fall in revenues from nominated blocks owing to 1) lower net realizations and 2) one time adjustment for changes in crude oil sales agreement (COSA) with oil marketing companies. Crude oil revenues from JV fields increased 56.1% yoy driven by higher production at the Rajasthan block. While the net realizations on sales volumes of crude oil from nominated blocks reduced owing to increased subsidy burden, higher contribution from JV field (non subsidized oil) helped offset the impact to some extent.
Net crude oil realizations were at US$46.8/bbl as compared to US$82.6/bbl in Q2 FY12. 20.7% yoy depreciation in rupee against the US Dollar also helped reduce the impact of net realizations decline. Gas segment revenues were higher by 26.3% yoy on the back of 26% jump in rupee realizations driven by rupee depreciation. Revenues in VAP segment also rose as realizations were higher in line with crude oil prices.
Subsidy burden more than doubles on yoy basis
Subsidy incidence at Rs123bn was higher than our estimates. As per the government notification for Q2 FY13 subsidy sharing pattern, the total upstream contribution was at Rs152bn, which contributes to about 40.2% of the gross under recoveries. ONGC’s contribution to the upstream subsidy share was at 81%.
OPM falls 11ppts yoy and 302bps qoq
During Q2 FY13, ONGC reported 28.3% yoy fall in operating profit and 11ppts yoy fall in OPM. The key reasons for the fall were 1) 779bps yoy increase in statutory levies as percentage of net sales on the back of higher cess on crude oil production and 2) 131bps yoy increase in staff costs as percentage of net sales driven by one time provision for long term service benefit and introduction of mining allowance for employees.
|As a % of net sales||Q2 FY13||Q2 FY12||bps yoy||Q1 FY13||bps qoq|
PAT lower than expectations at Rs59bn
Other income was higher by 68% yoy owing to 1) excess provision written back for royalty, 2) excess provision written back for COSA agreements and 3) higher dividend income. Depreciation and depletion was higher by 13.7% yoy mainly on account of 76% yoy jump in dry wells and survey charges. Depletion was lower by 11.5% as reserves for Rajasthan field have been raised. Nevertheless, PAT at Rs59bn was down 32% yoy and was lower than expectations.
Key takeaways from the conference call
- At the Imperial field in Russia, the production continued to witness natural declines as the company searches for the right technology to drill the tight reservoir, before making any incremental investments. The production in the quarter from the field was seen at ~12,000bpd.
- The transaction formalities on the $1bn Azerbaijan acquisition are expected to be finalized by the end of FY13. On the Syrian field, the management informed that the production details have not been forthcoming from the National oil company and thereby ONGC has not been recognizing revenues since December 2011. On the Sudan block the production has seen qoq improvement on back of production from North Sudan fields. While North Sudan is currently producing ~52,000bpd, South-Sudan will take another 5-6 months to resume production.
- During the quarter, the company drilled 24 exploration wells and 85 development wells. Of the exploration wells, there were four deep water; five shallow; fifteen onshore wells. In the development wells, there were 30 shallow and 55 on shore wells drilled.
- On the east coast, the management appraised regarding extension of the appraisal period on the KG 98/2 block and Mahanadi basin. On the KG 98/2 block, the company now plans to drill eight wells by November 2013 before taking a decision on commerciality. On Mahanadi basin, the appraisal period will be now till December 2013, during which the company plans to drill five wells.
- On the capex, the management guided for a capex of Rs331bn in FY13 of which ~Rs140bn has already been spent in the first half of the year.
On the marginal fields, while facilities will be completed on most of the fields by mid CY13 but peak production from the fields will only be seen in CY14 when the optimal numbers of wells are drilled.
Management informed of the following production targets:
- FY13: Oil production of 23.64mt ; 3.365mt from JV’s; Gas production : 23.75bcm; 1.984bcm JV’s
- FY14: Oil production of 25.79mt ; 3.314mt from JV’s; Gas production : 24.61bcm; 1.836bcm JV’s
Downgrade to MP
While ONGC trades at steep discount to global peers on the basis of EV/boe of proved reserves, going ahead 1) domestic oil production from nominated fields is likely to remain flat (against management guidance of increase), 2) increase in JV production dependent on government approvals, 3) continued uncertainty over production at OVL and 4) subsidy overhang. These factors compel us to downgrade our rating to Market Performer with a revised 9-month price target of Rs290.
|Y/e 31 Mar (Rs m)||FY11||FY12||FY13E||FY14E|
|yoy growth (%)||15.6||25.2||12.3||1.3|
|yoy growth (%)||15.7||25.3||(11.1)||
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