Oil and Natural Gas Corp. Ltd (ONGC) reported a 2.1% jump in revenues for the third quarter of FY10 quarter-on-quarter (q-o-q), ahead of our estimates on higher than expected net crude realization. Though earnings before interest, tax, depreciation and amortization grew 5.7% q-o-q, reported profit after tax declined 40% q-o-q on sharply higher dry-well write-offs and sharply lower other income.
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Crude production declined 4.5% year-on-year (y-o-y) as the company continued to invest in arresting the decline from its largest fields. Gas production was flat y-o-y. Average realization grew 2.3% q-o-q owing to lower than anticipated subsidies. While the subsidy sharing mechanism for FY10 still remains unclear, we note that the burden on ONGC will not change meaningfully in both the scenarios for FY10.
ONGC reported crude sales volume up 2.2% q-o-q and gas sales volume up 1% q-o-q. Average crude realization during the quarter was $57.7 per barrel, up 70.5% y-o-y, 2.3% q-o-q. Dry-well expenses increased 280% q-o-q to Rs2,480 crore as the company wrote off more than 20 wells. Other income fell as the company reversed the interest accounted for in earlier quarters on funds extended to ONGC Videsh Ltd (OVL) and a drop in yield on cash balance.
It is still not clear whether the government will continue to fund the cooking fuel subsidies in FY10 leaving upstream companies to pick up auto fuel subsidies. Current crude price indicates that auto fuel subsidies will be roughly one-third of the overall subsidies, indicating that ONGC’s FY10 earnings per share (EPS) will not be affected by any change in government of India’s policy. However, flip-flop by the government on the subsidy sharing policy does ONGC no good.
We expect OVL to deliver 8% production compound annual growth rate of over FY09-12. Any move to remove subsidies on petrol will reduce ONGC’s subsidy burden and improve net realization. We expect ONGC’s share of crude subsidies to rise to Rs5,850 crore in the fourth quarter of FY10. We maintain buy with target price of Rs1,344 per share.
Graphics by Yogesh Kumar/Mint