Net realisation comes down

Subsidy payout of $63.3 on gross realisation of $109.9 a barrel is a drag

We maintain our Buy rating on ONGC with a target price of R320 based on sum-of-the-parts methodology. ONGC trades at 45% discount to its global peers on EV/BOE (enterprise value/barrel of oil equivalent) [1P—proven—basis] and likely subsidy rationalisation remains a long-term trigger. Implied dividend yield of FY12 dividend stands at 4%. The stock trades at 9xFY13e EPS of R29.5.

Reported numbers lower than expected: ONGC reported sales of R198 billion, Ebitda of R103 bn (vs estimates of R119 bn) and net profit of R59 bn (vs R64 bn) for Q2FY13. The numbers were below expectations primarily due to lower sales, partly compensated by lower DD&A (depletion, depreciation and amortisation) at R37 bn (estimate of R40.6 bn) and higher other income at R20 bn. Net sales were impacted by lower net realisation at $46.8 per barrel due to lower gross realisation at $109.9 per barrel and higher per barrel subsidy at $63.1 per barrel—led by lower oil sales.

Implementation of new COSA impacts gross realisation: Gross realisation was impacted by the implementation of new COSA (crude oil sales agreement) with OMCs (oil marketing companies), with effect from April 2010. Second quarter numbers included prior period impact of R6.5 bn and recurring impact of R500m.

Subsidy payout of R123 bn; net realisation at $46.8 per barrel: We model upstream subsidy sharing at 40% for FY13 as H1FY13 upstream sharing was 35%, it implies H2FY13 sharing at 45%. ONGC's subsidy payout stood at R123 bn (versus R57 bn in Q2FY12 and R123 bn in Q1FY13). Its share in the overall upstream share was 82%.

Upstream sharing estimated 40% in FY13: We model upstream subsidy sharing at 40% for FY13/FY14. ONGC's Q2FY13 subsidy stood at R123 bn and its share in upstream was 81.6%. With FY13e under-recoveries at R1.5 trillion (vs R1.4 trn in FY12), it is unlikely that the government will reduce the subsidy burden on upstream companies.

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