ONGC’s gas prices have risen 16.5% in 2HFY18 and should rise another 10-15% in the next 12 months driving a 39% rise in natural gas Ebitda in FY17-21E, helped also by higher output.
ONGC’s gas prices have risen 16.5% in 2HFY18 and should rise another 10-15% in the next 12 months driving a 39% rise in natural gas Ebitda in FY17-21E, helped also by higher output. Still, oil prices are more critical where every $1 change impacts EPS by 3.2%. We expect oil prices to gradually rise to $65 Brent underpinning our Buy rating, noting also that its 20-50% discount to global peers leaves ample cushion even if ONGC were to overpay for HPCL.
The government has raised India’s domestic natural gas prices by 16.5% to $3.2/mmbtu (NCV) from 2HFY18. This comes along expected lines but should still help ONGC after ten quarters of falling realisations. Indeed, we expect prices to rise another 10-15% in the next year helped by firmer NBP prices and RUB before plateauing at $3.6.
Together with higher production, we expect this to lift natural gas Ebitda by 39% in FY17-21E. This may be higher still if the government changes the price formula as ONGC has been asking. We are less hopeful but $1 = 10-14% for EPS.
Longer term, though, blended realisations could rise beyond this $3.6 plateau as ONGC’s deepwater projects start up. Some of it is near term but material upside has to wait for KG-98/2 which ONGC targets in FY20. We expect FY22 and value it at $2.7 bn or `13/share.
In the meanwhile, though, oil prices remain more important with every $1 change lifting EPS by `0.58. We expect Brent to rise gradually to $65 but concede that the path could be long and arduous. Oil prices have softened after their recent run-up, for example, although they are still similar to where we peg our FY19 EPS at $58 Brent.
Higher Brent is central to our constructive outlook for ONGC but even otherwise, its 20-50% discount to global peers appears excessive. It stacks up well among peers, for example, with better through cycle return ratios despite its past subsidy burden.
As the uncertainty around the impending HPCL (Unpf) deal lifts, we expect the shares to rise. Indeed, unless ONGC egregiously overpays, the deal should be EPS accretive and ROE neutral with the dilution to fair value modest and impact on gearing manageable.
We retain Buy with Rs 200 PT that builds in Rs 11/sh dilution in fair value from ONGC paying Rs 500/share for HPCL. Lower Brent and expensive M&A are key risks.
Company description: ONGC is the largest oil & gas exploration and production company in India and contributes close to 80% of India’s oil & gas production. As of March 2011, ONGC had 962MMtoe of 1P reserves. Through its subsidiary ONGC Videsh Limited, the company has participating interests in a number of upstream assets around the world. ONGC also owns 72% stake in MRPL with refining capacity of 15 MMTPA.