We reiterate ?outperform? on ONGC and set a target price of Rs 362 per share. At FY15e P/E of 8x and EV/boe of only $4, the stock merits a relook in view of the recent policy developments and attractive valuations. We see 28% earnings growth in FY15e via policy changes (gas price hike) and a weak rupee, with potential upside from subsidy reduction over FY15-16e. We build in a production CAGR of ~1% in domestic and ~4.5% in international assets over FY13-16. We estimate net realisations of ~$48-52 per barrel over the period, factoring in ONGC?s average share at 45-55% of the total subsidy.
We recently interacted with the company?s management and learnt that FY14e oil target in all likelihood will be missed. ONGC is likely to achieve ~97% of its FY14e ?very good? MoU target of 27.2 million tonne (MT). Performance of the gas business is likely to be marginally better, with production @24.9 bcm versus target of 25.1 bcm. However, ONGC maintains ambitious production targets of 28.7 MT of oil and 26.5 bcm of gas for FY15e.
The company is planning a massive capex. ONGC plans to invest R1.64 lakh crore over FY13-17e, implying an investment of R35,000 crore to R40,000 crore per annum. Though aggressive, we believe, the investment is necessary to offset the natural decline at aging fields.
The management has guided to ~4.8 tcf of gas reserves and ~700 mmbbl of oil reserves in Northern Development area of the KG DWN 98/2 block, which will enable peak gas output of ~22 mmscmd starting FY17e. Overall, ONGC expects KG and other marginal fields to together deliver 30-35 mmscmd of additional gas over FY17-19e.
IDFC Institutional Securities
