For Q4’09, Oil and Natural Gas Corporation Ltd.’s (ONGC)’s net sales declined 12.3% y-o-y to Rs137 billion, triggered by lower crude oil prices (at around $40-45 per barrel), coupled with the Government of India’s (GoI’s) subsidy-sharing arrangement that compensates the oil marketing companies (OMCs) for their under-recoveries.
On 1 July, 2009, the Oil Secretary RS Pandey announced the ruling that upstream oil companies will not be required to share the subsidy on LPG and kerosene.
The under recoveries on the sale of LPG and kerosene will be taken care of by the Government. ONGC contributes more than 30% of the total domestic production of natural gas, and such a move is clearly going to boost the Company’s top-line.
Further, the GoI announced an increase in the petrol and diesel prices by Rs 4 per litre and Rs2 per litre, respectively, in an attempt to reduce the underrecoveries borne by the OMCs.
ONGC, which shares a substantial portion of these under-recoveries, stands to benefit from this hike in the form of lower subsidy burden.
While the lower subsidy burden in Q4’09 provided some respite to ONGC, a decline in average price realization (due to lower crude oil prices) continued to pressure the topline.
However, crude oil prices witnessed a sharp recovery during the past three months to around $60-65 per barrel, driven by the early signs of revival in the global economy and the production cuts implemented by OPEC.
Looking forward, we expect a recovery in demand on the back of recovering global economies.
On the other hand, we expect OPEC to ease its production cuts beyond its initial target price of crude oil at around $70 per barrel. Given this demand-supply scenario, we expect the crude oil price to hover around $65-70 per barrel in the near-term.
The stock is currently trading at a forward P/E of 10.8x and 9.6x for FY10E and FY11E, respectively.
We have valued ONGC’s standalone business by using the DCF method and ONGC Videsh Ltd. (OVL) by using peer-based EV/2P reserves of $12.5 per barrel of oil equivalent (boe).
Other investments of the Company have been taken at the market value. Our SOTP-based valuation suggests a fair value of Rs1,052.
Since our target price does not provide any significant upside potential from the CMP, we give a HOLD rating to the stock.