Dear All,
Forwarding you the Impact Analysis of Higher Subsidy Burden on ONGC.
ONGC - Higher Subsidy Burden - Impact Analysis
Subsidy burden of upstream companies raised: The government has raised the overall oil subsidy payout for public sector upstream companies to 38.7% of the under-recoveries for FY2011. ONGC’s subsidy burden for FY2011 would now stand at `24,892cr. Oil India and GAIL will have to shell out `3,293cr and `2,111cr as fuel subsidy. This development has surprised us negatively, as upstream companies have been sharing ~33.0% of the subsidy burden from the past three years.
Lower our estimates: We now expect lower realisations for 4QFY2011 on account of higher discounts to oil marketing companies. Overall, our net realisation estimates are lowered from US$60/barrel to US$55/barrel for FY2011 due to higher-than-expected subsidy. Also, we now model higher subsidy (38.7% of total under recoveries) for FY2012 and FY2013. Thus, our FY2011, FY2012 and FY2013 EPS estimates stands lowered by 8.2%, 4.4% and 3.8%, respectively.
Further delay in FPO not ruled out: The raising of the subsidy share of upstream companies to 38.7% for FY2011 by the government leaves lot of uncertainty over future subsidy-sharing arrangements. We believe this development could potentially delay the upcoming `12,000cr FPO (scheduled for July 2011).
Outlook and valuation: Going forward, incremental production from marginal fields is expected to more than offset any decline in production from the ageing fields. ONGC’s subsidiary, OVL is also expected to report a jump in volumes by 2013 at ~12mn tonnes on the back incremental productions from Myanmar, Sakhalin-1 and Venezuela coming on stream. Further, deregulation of diesel and resolution of the royalty issue with Cairn could be significantly earnings accretive for ONGC. Higher gas price from extant fields and mark-to-market prices from incremental production could accrete earnings further. Significant discoveries in high-potential Cambay, KG basin and Mahanadi fields (still under appraisal) could further boost valuations. We believe the risk-reward ratio is now favourable as the current price level factors in the higher-than-expected subsidy payout for FY2011. Although, there is FPO overhang on the stock in the near term, we believe increased volumes and net realisation should offset these concerns.
We recommend Buy on the stock with an SOTP revised target price of `328 (`356 earlier).
Kindly click on the following link to view the Report.
ONGC - Higher Subsidy Burden - Impact Analysis
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Fundamental Advisory Desk
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