Oil & Natural Gas (ONGC) has announced a significant oil find in the shallow water KG basin. The block KG-02 is close to Reliance Industries’ gas find, is put on fast track development and is one of ONGC’s notable find in recent years.
ONGC plans to explore the current field by combining it with the older ONGC finds under a common production facility. ONGC expects to start production with an initial rate of 20,000 bpd with peak production of approximately 150,000 bpd by FY16-17.
In addition, there will not be any profit sharing in this block as it is a nomination block. While the discovery is some time away, it does ease some concerns on ONGC’s production capabilities beyond Mumbai High, which has been its flagship field for decades.
Indian finance minister indicated that if current crude prices hold up, the government would not have to issue any oil bonds. The oil marketing companies are currently making profits on the sale of petrol and diesel, while they continue to lose money on the sale of kerosene and LPG.
In our earlier note, we mentioned that while ONGC might lose favor as a stock in the long run due to falling crude prices, but 3QFY09 will see higher-than expected realisations on the back of low subsidy contribution.
We reiterate that 2Q2FY09 subsidy payout was a one-time event and we expect better realisation in the coming quarter.
We maintain our BUY rating on ONGC and our TP of Rs821/share based on sum-of-the-parts (SoTP) methodology. We value ONGC’s standalone business at Rs526/share (3.5x EV/EBITDA on FY10 EBITDA).
For valuing the domestic business, we apply a 20% discount to peers thus accounting for ONGC’s subsidy burden. ONGC Videsh is valued at Rs246/share using EV/bbl of $10 (includes Imperial Energy’s 1P reserves of 176m boe).
ONGC’s stake in MRPL is valued at Rs25/share using DCF. We value ONGC’s other investments at market prices of Rs24/share. We believe ONGC shares have not yet priced in the potential upside from better than consensus realization for 3QFY09.