Published on 12/01/2018 2:54:47 PM | Source: Motilal Oswal Securities Ltd
Buy ONGC Ltd For Target Rs.227.00 - Motilal Oswal
Growth in gas production to continue
Key takeaways from our meeting with management
Gas production growth to continue
* Gas production growth over the near term is expected to be driven by the Daman, C26, S1/Vashistha and Bassein fields. Gas produced from S1/Vashistha is likely to command premium pricing.
* Commencement of production from the KG-DWN-98/2 block could see some delay from the earlier planned mid-2019. A total of 34 wells need to be drilled. A total of three rigs are expected to be deployed, with each rig drilling one well in three months.
* ONGC had recently acquired a stake in GSPC’s KG basin block. Rig rates for this block are being renegotiated, post which the fifth well would be drilled by the company. A plan for further development would be charted after getting data from the fifth well. We expect further delays in the project.
Oil production to remain flat
* WO26, B127 and Ratna are expected to increase oil production. Oil production from the nominated fields is expected to increase, while that from JVs is expected to decline. As a result, we expect flat oil production over FY18-20.
* Oil prices are expected to stabilize around current levels, led by normalization of unplanned shutdowns and increased US production of oil from shale.
* At current levels, the company does not expect subsidies to return; full realization is expected to continue.
* Current price for gas production from difficult fields stands at USD6.3/mmBtu (GCV) v/s USD2.89/mmBtu for APM gas. Gas production from S1/Vashistha and KG-DWN-98/2 would fetch premium pricing, benefiting profitability. Costcontrol measures are also yielding results, in our view. Using Brent of USD60/bbl, we estimate EBITDA of INR743b and EPS of INR22.7.
* The ongoing valuation exercise for HPCL is a cause of concern. An unjustified premium would be a double-whammy through holding company discount that investors would attach to ONGC’s stake in HPCL.
* The stock is trading at 8.2x its FY19E EPS. We value the stock at INR227, valuing it at 10x average FY19-20E EPS, adjusted for other income. We reiterate our Buy rating on the stock. Our valuation includes a negative value of INR4 for its stake in the Mozambique block. We also estimate that every USD5/bbl would result in ~10% change in EPS.
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