The Union cabinet on May 19 approved hike in gas produced by ONGC from nominated fields (APM gas) by 113% to $4.2/mmbtu. We were assuming 21% hike in APM gas price in FY11E and then gradually administered price mechanism (APM) gas price rising to $4.2/mmbtu in FY20E. We have upgraded FY11E-FY12E EPS by Rs 12-15/share (10-13%) and PO by Rs 77 (5%) to Rs 1,491/share. Some progress on reducing oil subsidies is also possible in FY11E, which would mean even more upside to earnings and public offer (PO). We, therefore, retain Buy on ONGC.

The APM gas price was Rs 3,200/mscm (at 10,000 Kcal) since July 2005. ONGC?s price realisation adjusted for calorific value was Rs 2,880 ($1.8/mmbtu). APM gas price has now been hiked by 113% to Rs 6,818/mscm ($4.2/mmbtu). Though there will be no adjustment for calorific value, ONGC will have to bear 10% royalty and hence its net realisation will be Rs 6,198/mscm ($3.8/mmbtu). The revised APM gas price is valid up to March 2014 (FY14E). APM gas price is likely to be reviewed in April 2014 (FY15E) and a further rise likely.

The hike in APM gas price to $4.2/mmbtu from $1.8/mmbtu would mean earnings per share (EPS) upside of Rs 18/share in a full year. However, we have upgraded FY11E EPS by Rs 11.8 (10%) given that the benefit of hike will be for 10 months and 21% price hike was already assumed. We have upgraded FY12E EPS by Rs 14.8 (13%). We have also raised ONGC?s PO by 5% to Rs 1,491.

We expect large reserve accretion and consequent re-rating of ONGC. It has a large proportion of India?s exploration acreage in highly prospective areas. Though its success rate has been below 10% in 2000-07, this is changing as its exploration focus shifts to new exploration licensing policy (Nelp) acreage from nomination. It has 57% of its Nelp acreage in highly prospective areas vs only 4% of its nomination acreage. Already success rate has risen to 25% in FY07 and 44% in FY08 from just 6-9% in FY05-06.

The revised APM gas price is valid up to March 2014 (FY14E). APM gas price is likely to be reviewed in April 2014 (FY15E).