ONGC: new deal positive but near-term concerns remain

ONGC: new deal positive but near-term concerns remain

Decline in production has been a key problem for Oil and Natural Gas Corp. Ltd (ONGC) for some time now. That is why the company’s latest stake purchase is a positive. ONGC’s subsidiary ONGC Videsh Ltd (OVL) has signed definitive agreements to acquire Hess Corp.’s 2.72% participating interest in Azeri, Chirag and Guneshli (ACG) fields in Azerbaijan and 2.36% interest in the Baku-Tbilisi-Ceyhan pipeline (BTC) for $1 billion (Rs 5,550 crore today).

While the financing details are not available, ONGC’s cash position appears quite comfortable. On a consolidated basis, as on 31 March, the company had cash and cash equivalents to the tune of around 28,000 crore. The debt (long-term borrowings and short-term borrowings) to equity ratio stands at 0.1 times.

As far as the valuations are concerned, according to an analyst while it’s more or less on par, the additional capex made on this field will determine whether it works out to be lucrative.

Investors though, would do well to keep a tab on the capital expenditure on the field. Meanwhile, even as the deal is positive, for the ONGC stock the scenario does not change dramatically. Subsidy uncertainty issues and higher crude oil prices continue to pose a threat to sentiment.

After posting a 1.3% production decline in fiscal year 2012, ONGC’s June quarter production numbers, too, did not bring any reason for cheer. For the quarter, domestic production had declined again, both on a year-on-year and quarter-on-quarter basis. Of course, OVL, too, disappointed with its June quarter production numbers. For the quarter, OVL’s oil production declined sharply by 33% year-on-year led by production issues in Sudan, Syria and Russia.

The good thing, however, is that while announcing its June quarter numbers, ONGC also said it had made a big oil discovery. Analysts hope this will fuel the company’s production numbers eventually, although it’s not going to happen anytime soon.

Since the beginning of this fiscal year, the ONGC stock has gone up by 3% in comparison to the 1.6% increase in the benchmark Sensex index. At 276.50, the stock trades at 8.7 times its estimated earnings for this fiscal year. While valuations appear cheap, higher subsidy burden given the higher crude oil prices are likely to keep meaningful upsides at bay.