We maintain 'add' rating on Oil and Natural Gas (ONGC) and maintain FY15/16 earnings estimates and the fair value is unchanged at R439 per share, valuing the stock on SoTP-based value of 4.9x FY16e cash earnings for core business, reserve upsides and investments.
We see a high probability of government raising the net oil realisation levels for ONGC, as decline in crude prices eases under-recoveries concerns. If $56 per barrel subsidy levels are to continue, ONGC’s net oil realisation can be significantly impacted. Delays in gas price hike is a concern, raising uncertainty for FY15/16 earnings.
Outlook on subsidy reforms critical. ONGC’s Q1FY15 earnings at R4,800 crore (flat q-o-q) is below estimates, affected by R3,800 crore dry well write-offs (versus R2,000 crore I-sec estimates). Net oil price at $47 per barrel is better, on higher gross oil price realisation, resulting in outperformance in ebitda (R12,500 crore, up 13% q-o-q). ONGC management has maintained FY15 production guidance – 27.14 mmt for oil (up 4.4% on-year) and 25.34 bcm for gas (up 2% on-year).