ONGC is investing heavily in the E&P segment. In FY08, it spent more than 96% of its total capex of Rs162.2 billion on the E&P segment, resulting in 28 discoveries.
Out of the total capex of Rs1,300 billion under the XIth five-year plan, more than 90% is expected to be spent on the E&P segment. Given the scenario of rising crude prices, this investment augurs well for ONGC.
Besides increasing its reserve base, the company is developing exploration blocks. It has planned to develop the deepwater block KG-DWN-98/2 and PEL acreage KG-OS-DW4.
Efforts to improve oil recovery from its existing fields are already underway with Rs63.4 billion investment planned for the second phase of the Mumbai High redevelopment that will improve oil recovery to over 346 MMT.
Besides oil, ONGC is aggressively pursuing initiatives to source energy from unconventional sources such as Coal Bed Methane (CBM), underground coal gasification, and gas hydrates. It is also investing Rs6 billion for generating 1,500 MW of power through wind energy.
However, the likelihood of an ad hoc increase in subsidy-sharing remains a major concern.
At the current price of Rs866.3, the stock is trading at a forward P/E of 7.7x for FY09E and 7.5x for FY10E. Based on our valuation, we have arrived at a target price of Rs1,235 for FY09E, and maintain BUY rating on the stock.