Production ramp-up key for ONGC

Despite new discoveries and rising reserves, lower output targets hit sentiment

Oil and Natural Gas Corporation’s results for the quarter ended September disappointed the Street. A higher subsidy share of 40 per cent, against 33 per cent in the year-ago period, hit performance. Decline in the company’s crude oil production, as well as in ONGC Videsh Ltd’s (OVL) production due to geo-political issues, added to woes. ONGC also scaled down its production expectation for the year.

On Friday, the stock fell three per cent. Yesterday, it dropped an additional 0.7 per cent, to close at Rs 255 on the BSE (the Sensex fell one per cent). Analysts feel the near-term upside for the stock would remain capped, owing to a hangover of the subsidy burden and lower crude oil production. However, joint-venture production would be boosted, primarily by the output from Cairn India.

Output woes
At 5.62 million tonnes (mt) ONGC’s crude oil production during the September quarter was seven per cent lower than in the year-ago period and 0.5 per cent lower than in the previous quarter. Analysts at HSBC said this was the fourth sequential quarterly decline in crude oil production. They added the company’s crude oil production from its nominated blocks would record a moderate fall.
 

SUBSIDY CONCERNS
In Rs crore	FY12	Q1FY13	Q2FY13
Net sales	75,758	20,084	19,788
Y-o-Y change (%)	15.1	24.0	-12.5
Ebitda	36,554	9,930	8,289
Ebitda (%)	48.3	49.1	41.7
Net profit	22,970	6,078	5,897
Y-o-Y change (%)	21.4	48.4	-31.8
E: Estimates                       Standalone financials                     Source: CapitaLine Plus

OVL’s crude oil production, too, dropped to 0.99 mt from 1.15 mt in the previous quarter. IDBI Capital analysts said production of 0.08 mt in Syria wasn’t accounted for in the quarter, owing to political uncertainty in that country. A fall in production was also seen at Imperial Energy, Russia, as OVL stopped investing in the block, awaiting clarity on the appropriate technology for production from the tight reservoir. However, early next year, Azerbaijan might provide a leg-up in production.

Lowered production guidance
According to analysts at IDBI Capital, the company has lowered its oil production guidance for FY13 from 27.5 mt to 27 mt. For FY14, too, the oil and gas production guidance has been scaled down from 32.1 mt and 27.4 billion cubic metres (bcm) to 29.1 mt and 26.4 bcm, respectively. Also, OVL’s production estimates for FY13 and FY14 have been cut from 7.5 mt and 8.6 mt to 6.9 mt and 7 mt of the oil equivalent, respectively.

Analysts at Religare Securities said ONGC’s production expectation was revised due to a natural decline and deferment in the commissioning of marginal assets. They added various marginal assets would come on-stream from 2013-15.

Q2 performance
For the quarter ended September, revenue fell 12.5 per cent year-on-year, primarily led by a high subsidy burden. ONGC’s discount of $56 a barrel to oil marketing companies on the sale of crude oil (as directed by the government) corresponded to a 40 per cent share in total under-recoveries of oil marketing companies, incurred on the sale of fuel below international prices. For the quarter ended June, the share stood at 33 per cent.

With the net revenue declining, increasing expenses exerted pressure on operating profit margins. The company’s profits declined 31.8 per cent year-on-year to Rs 5,898 crore.

Outlook
Though the subsidy burden was high (40 per cent), this was expected. With the actual share of the subsidy to be determined by the government only at the end of the financial year, HSBC analysts feel the ad hoc nature of subsidy-sharing would remain an overhang on the stock. Arya Sen at Jafferies says with the management scaling down the FY14 crude oil production estimate for ONGC and OVL, he has cut his earnings per share estimate slightly, as the high subsidy share and low OVL production was offset, to an extent, by the weak rupee.

Alok Deshpande at Elara Capital feels with the focus shifting from uncertainty on subsidy to fundamental drivers such as production growth and potential under-achievement of targets, the stock would be under pressure for the next couple of quarters. Though the stock (Rs 255) is reasonably below the price targets of Rs 276-300, it would remain under pressure, owing to concern on production.