We maintain ?outperform? on Oil and Natural Gas (ONGC), but cut target price by 1% to R355 ( based on a sum-of-parts methodology. We cut our FY14e PAT by 7% on slower-than-expected growth in volumes from marginal domestic fields and Carabobo (Venezuela).
The gas price hike coupled with ONGC Videsh (OVL) improving international presence at Azerbaijan (ramp-up of ACG fields), Mozambique (15% stake purchased recently in Rovuma Area 1) and Brazil (BC-10) are key positives. We also believe that the domestic volume trajectory is poised to turn around in FY15e. ONGC?s Q2 FY14 standalone PAT of R6,060 crore (up 51% q-o-q, 3% y-o-y) was slightly higher than street estimates, mainly due to a lower subsidy and higher other income. A change in accounting treatment of well-drilling expenses also added R105 crore to pre-tax profits.
Net realisation of $44.8 per barrel was up 12% q-o-q, despite higher discount as gross realisations for ONGC rose to $109 per barrel. Upstream firms have been directed to pay 47% of Q2 FY14 industry under-recoveries of R35,300 crore, which resulted in a 9% q-o-q increase in ONGC?s upstream burden to R13,800 crore. This was more than offset by the $4.6 per barrel q-o-q rise in net realisations to $44.8 per barrel. ONGC shared 82.5% of upstream burden. We expect under-recoveries to decline to R1.5 lakh crore in FY14e (from R1.6 lakh crore in FY13), as price hikes and weak diesel demand curtail losses.
Macquarie
