During Q2’09, Oil and Natural Gas Corporation Limited (ONGC)’s standalone net sales increased 12.9% y-o-y to Rs174.1 billion.
While the surge in the global crude prices and the weakening rupee were expected to drive ONGC’s financials, its performance was dented by the excessive subsidy burden (Rs126.7 billion) it had to shoulder in order to limit the losses of the oil marketing companies (OMCs).
As a result, ONGC’s standalone adjusted net profit declined 5.7% y-o-y to Rs48.1 billion.
Due to the global economic crisis, oil prices have fallen by more than 60% from their peak of $147/bbl in mid-July to the current lows of $50/bbl. This is mainly due to the dampening fuel demand from the major consuming nations.
Meanwhile, the International Energy Agency (IEA) has lowered its oil demand forecasts by 500,000 bopd for H2’08 and by 400,000 bopd for 2009. Thus, with reducing demand, we expect oil prices to be under pressure till FY10, thereby adversly affecting net realizations.
However, we believe that once the global economy revives, demand for crude oil and natural gas will recover, mainly due to increased demand from developing economies such as India and China.
The IEA has forecast that demand for oil will increase from 85 mb/d in 2007 to 106 mb/d by 2030, even after considering the full impact of the current economic crisis. Consequently, we believe that crude oil should recover to $75-80/bbl in the long-term.
At the current market price (CMP) of Rs681.25, the stock is trading at a forward P/E of 8.5x for FY09E and 8.7x for FY10E. We have valued the Company by using the Sum-of-the-Parts (SOTP) valuation technique.
We have valued the ONGC operations by using DCF, assuming a WACC of 14% and a terminal growth of 5%; for subsidiary ONGC Videsh (OVL), we have applied the EV/BOE multiple of $13.5/bbl. All the other investments have been valued at the CMP.
Thus, using SOTP, we have arrived at a target price of Rs756 per share, which provides an upside potential of 11% from the CMP. Considering the recent downturn in the crude oil prices and our valuation, we reiterate our HOLD rating on the stock.