Systematix

Institutional
Research
November
3,
2007

Upstream PSU Sector Report

Sector Report

November 19, 2014

Oil & Gas

Industry

Declining fuel under-recoveries: A win-win for GoI and Upstream PSUs

Sector Rating - ATTRACTIVE

Price performance - BSEOIL vs. Sensex

We initiate coverage on upstream PSUs with positive stance given huge scope for
reform-driven earnings growth [15%/22% EPS CAGR for Oil and Natural Gas
Corporation (ONGC)/Oil India Limited (OIL) over FY14-FY16E on the back of gas price
hike and lower subsidy burden]. Given losses for oil business (see Table 6 on page 6) of
upstream PSUs at current crude price of USD78/bbl and subsidy of USD56/bbl, we are
hopeful of rationalization of subsidy sharing at 50:50 between Government of India
(GoI) and upstream PSUs. A lower upstream share (vs our assumption of 65%) would
further strengthen our conviction on ONGC and OIL. Hence, valuations of ONGC/OIL
seem attractive at 9.6x/8x FY16E EPS vs average of 14.1x one-year forward earnings for
pure E&P peers (see Table 2 on page 3) and we initiate our coverage on ONGC and OIL
with BUY rating.
Sweeping oil & gas sector reforms; clear focus to reduce under-recoveries

Upstream PSUs CMP (`)

TP (`)

+/(-) (%)

ONGC

391

461

18.0

OIL

588

734

24.7

Source: Systematix Institutional Research

Note: Prices as on 18th Nov 2014

ONGC Consolidated
Financials (`Mn)
Net Sales
EBIDTA
PBT
PAT
EPS (`)
EBIDTA Mar gin (%)
PAT margin (%)
Price/Earnings (x)
EV/EBIDTA (x)
ROE (%)
ROCE (%)

FY14

FY15E

FY16E

1,744,771 1,832,542 1,962,370

582,131
661,266
728,676
394,134
480,959
526,558
265,065
317,193
348,655
31.0
37.1
40.8
33.4%
36.1%
37.1%
15.2%
17.3%
17.8%
12.6
6.1
16.3%
18.5%

10.5
5.3
17.3%
19.7%

9.6
4.7
16.8%
19.6%

OIL India Standalone

Financials (`Mn)

FY14

FY15E

FY16E

Net Sales
EBIDTA
PBT
PAT
EPS (`)
EBIDTA Mar gin (%)
PAT margin (%)

91,267
35,416
44,104
29,813
49.6
38.8%
32.7%

114,397
53,462
50,078
32,782
54.5
46.7%
28.7%

138,988
70,855
66,996
44,217
73.6
51.0%
31.8%

Price/Earnings (x)
EV/EBIDTA (x)
ROE (%)
ROCE (%)

11.9
9.5
14.9%
16.8%

10.8
6.0
15.3%
16.3%

8.0
4.5
19.2%
20.5%

The Cabinet Committee of Economic Affairs (CCEA) has recently announced crucial oil &
gas sector reforms: 1) market-linked diesel price, 2) gas price hike to USD5.6/mmbtu on
net calorific value (NCV) basis, 3) premium gas price (still to be decided) for discoveries in
ultra-deep water, deep-water and high pressure-high temperature areas, and 4) modified
direct benefit transfer (DBTL) for LPG subsidy. Given GoIs intention to reduce underrecoveries and our estimate of losses for oil business of upstream PSUs at current crude
price and fixed subsidy of USD56/bbl , we believe GoI would change subsidy sharing
mechanism (50:50 sharing ratio as proposed by Oil Ministry) in favor of upstream PSUs.
Lower upstream subsidy burden to increase net crude oil realisation
Given declining fuel under-recoveries (our estimate of `663bn in FY16 vs `1,399bn in
FY14) on the back of diesel de-regulation and fall in crude oil price, we see strong case for
lower subsidy burden and consequently higher net crude realisation for ONGC and OIL.
Hence, we model FY15E/FY16E blended upstream subsidy burden at USD52.7/USD42.3
per barrel and net realisation at USD49.9/USD57.7 per barrel.
Crude oil price could increase on potential oil supply cut from Saudi Arabia
Brent crude oil prices have declined to USD78/bbl from USD110/bbl since June 2014 due
to abundant supply, slowing demand growth and appreciation of the US dollar. We
expect oil price to increase as Saudi Arabia has scope to reduce oil supply by around
2mbpd (million barrels per day) given ramp-up in Libyan and Non-OPEC oil supply. Hence,
we model crude price of USD100/bbl in FY16 vs current level of USD78/bbl .
Higher gas price to boost earnings (add ` 4.1/share to ONGCs FY16E EPS and ` 6.7/share
to OILs FY16E EPS)
st

GoI has announced new gas price of USD5.6/mmbtu (on NCV basis) with effect from 1
st
November 2014 with next reset date as 1 April 2015. We expect FY16E EPS of ONGC and
OIL to increase by `4.1/share and `6.7/share, respectively from the gas price hike.
Valuations

ONGC: We value ONGC at `461/share (11x FY16E EPS + `13/share for investments).
Rationalisation of subsidy sharing would increase our target price to `508/share (an
upside potential of 30% from CMP).
Abhijeet Bora
a [email protected]
(+91 22 6704 8067)

OIL: We value OIL at `734/share (9x FY16E EPS + `72/share for investments).
Rationalisation of subsidy sharing would increase our target price to `812/share (an
upside potential of 38% from CMP).

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Institutional Research

Table of Contents
Key Investment Arguments ................................................................................................................................................. 5
Sweeping oil & gas sector reforms; clear focus to reduce under-recoveries........................................................................... 5
Lower upstream subsidy burden to increase net crude oil realisation ................................................................................... 6
Crude oil price could increase on potential oil supply cut from Saudi Arabia ......................................................................... 8
Higher gas price to boost earnings (add `4.1/share to ONGCs FY16E EPS and `6.7/share to OILs FY16E EPS)...................... 10

Companies Section
ONGC (Valuation not factoring in upside from reforms) ..................................................................................................... 12
OIL (Favorable reforms; rising production) ........................................................................................................................ 15

Nov 2014

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VALUATIONS
Table 1: Valuation snapshot of ONGC and OIL
`/Share

ONGC

OIL

41
11

74
9

448

662

13
8
3

72
57
0

2
0
0
461
391
18%

0
8
7
734
588
25%

FY16E EPS
P/E multiple ascribed
Value of core business
Investments
IOCL
GAIL
Petronet LNG
NRL
Others
Target price
CMP
Upside/(Downside)

Comments
Value OIL at discount to ONGC as royalty on gross realisation on onshore oil production to
severely impact OILs earnings (see Table 23 on page 17)

20% holding-company discount at CMP

20% holding-company discount at CMP
20% discount to CMP
1x Book Value of `4,837mn
1x Book Value of `4,010mn

Source: Systematix Institutional Research

Table 2: Global Oil & Gas Peer Valuation

P/E (x)

EV/EBITDA (x)

CY14E

CY15E

CY14E

CY15E

Exxon Mobil
Suncor Energy
Marathon Oil Corp

12.8
11.0
12.5

13.9
11.7
16.1

5.8
5.0
4.3

6.4
5.0
4.8

BP PLC
Royal Dutch Shell
China Petroleum
Imperial Oil
Chevron Corp
Eni Spa

9.7
9.2
8.9
12.7
11.5
13.7

9.5
9.9
9.0
13.0
12.3
12.5

4.1
4.0
5.1
7.7
4.8
3.8

4.0
4.2
4.7
8.2
5.0
3.7

Integrated average

11.3

12.0

5.0

5.1

Occidental Petroleum
Hess Corp
ConocoPhillips
CNOOC Ltd

13.6
17.6
12.2
7.6

15.7
22.7
13.5
7.8

5.3
4.1
4.6
3.2

6.0
4.4
4.6
3.1

Apache Corp
Anadarko Petroleum
Southwestern Energy Corp
ONGC
OIL
E&P average

12.3
18.4
14.7
10.5
10.8
13.1

15.0
20.2
14.6
9.6
8.0
14.1

4.1
5.0
5.9
5.3
6.0
4.8

4.2
5.2
5.1
4.7
4.5
4.6

Total average

12.2

13.1

4.9

4.9

Source: Bloomberg, Systematix Institutional Research

Nov 2014

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Table 3: Comparison of per boe (barrels of oil equivalent) profitability of ONGC and OIL
OIL

FY12

Revenues
Statutory le vies
Total expenses
EBITDA
Other income
DD&A

48.1
12.1
26.7
21.4
8.9
4.5

Interest
0.0
Tax
8.4
PAT
17.4
PAT excluding other income 8.5
` /USD rate
48.0
RoCE
27.8%

FY13

FY14

FY15 E

FY16E

39.2
12.4
24.0
15.2
9.1
5.1

48.0
13.1
25.6
22.5
5.9
6.1

56.4
14.7
27.7
28.8
5.7
6.1

0.0
0.3
7.8
6.1
16.5 12.8
7.6
3.7
54.4 60.5
26.1% 16.7%

1.2
7.3
13.8
7.8
60.5
16.3%

1.2
9.2
18.0
12.3
60.0
20.1%

43.8
14.0
24.5
19.3
8.9
3.8

ONGC - Standalone

FY12

FY13

FY14

FY15 E

FY16E

Revenues
Statutory le vies
Total expenses

54.0
11.7
21.6

50.8
13.4
24.1

46.5
12.7
22.0

51.7
13.6
22.7

56.5
14.5
24.6

EBITDA
Other income
DD&A
Interest
Tax
PAT

32.4
3.1
11.9
0.0
8.1
15.5

26.7
3.3
11.3
0.0
5.9
12.9

24.5
4.2
10.5
0.0
5.8
12.4

29.0
2.8
11.6
0.0
6.5
13.7

32.4
2.8
12.8
0.0
7.1
15.0

PAT excluding other income 12.4

` /USD rate
48.0
RoCE
28.3%

9.5
54.5
22.9%

8.2
60.5
22.1%

10.9
60.5
22.1%

12.2
60.0
22.1%

Source: ONGC, OIL, Systematix Institutional Research

Note:1) ONGC financials also includes sales of value added products
2) For RoCE calculation of ONGC and OIL, EBIT includes other income
3) All figures in USD/boe except for ` /USD rate and RoCE

Table 4: Exxon Mobil (upstream business) per boe analysis over CY09-CY13
ONGC/OIL i s tra ding a t 32%/43% dis count
to a vera ge valuation of pure E&P pl a yers
on one-yea r forwa rd P/E ba s i s .
Wi th l ikely i mprovement i n profi ta bi l i ty
a nd return ra tios, we expect the va luation
ga p wi th global peers to na rrow down to
s ome extent

Nov 2014

Oil production (kbpd)

Gas production (mcfpd)
Oil + Gas (mn boe)
PAT (USD/boe)
RoCE

CY09

CY10

CY11

CY12

CY13

2,387
9,273
1416
12.1
23.4%

2,422
12,148
1601
15.1
23.3%

2,312
13,162
1622
21.2
26.5%

2,185
12,322
1526
19.6
21.4%

2,202
11,836
1503
17.9
17.5%

Source: Exxon Mobil CY13 Annual Report, Systematix Institutional Research

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KEY INVESTMENT ARGUMENTS

Sweeping oil & gas sector reforms; clear focus to reduce under recoveries

Di esel de-regulation to elimi na te a nnua l

di es el under-recoveri es of `628bn
Next l eg of s ubs i dy reducti on to come
from i mpl ementa ti on of DBTL for LPG
s ubs i dy

The CCEA has recently announced crucial oil & gas sector reforms: 1) market-linked
diesel price with effect from 18th Oct 2014, 2) gas price hike to USD5.6/mmbtu on
st
NCV basis with effect from 1 Nov 2014, 3) premium gas price (still to be decided) for
discoveries in ultra-deep water, deep-water and high pressure-high temperature
areas, and 4) modified direct benefit transfer (DBTL) for LPG subsidy (crucial for next
leg of subsidy reduction). The above initiatives clearly signal towards GoIs focus to
reduce fuel under-recoveries.
Given GoIs intention to reduce under-recoveries and our estimate of losses for oil
business of upstream PSUs at current crude price and fixed subsidy at USD56/bbl, we
are hopeful that GoI would change subsidy sharing mechanism (50:50 sharing ratio as
proposed by Oil Ministry) in the favor of upstream PSUs so that ONGC and OIL also
benefits from falling under-recoveries.

Table 5: Recent oil & gas sector reforms

Reforms announced

What changes with implementation of reform

Diesel price de-regulation

Market-linked diesel price

Gas price hike

To USD5.6/mmbtu from USD4.2/mmbtu

Premium gas price for ultra-deep water,

deep water and high-pressure/hightemperature areas

Premium from new gas price but premium would be

decided latter

To help monetization of high capex

gas discoveries

Modified DBTL for LPG subsidy

Fixed domestic LPG subsidy per cylinder (quantum not

fixed yet)

Control over distribution of subsidies

LPG and thus would reduce LPG
under-recoveries

Flexible E&P Policy

Expected reforms
Clarity on fuel subsidy mechanism
Implementation of DBTL for LPG
subsidy

Direct cash transfers to be made to customers bank

account or by linking Aadhar number to LPG and bank
database
All LPG consumers are required to compulsorily open
bank account to get LPG subsidy by April-2015 or pay
market-linked LPG price
Provides relaxation in timelines for submission of
Declaration of Commerciality (DoC) and Field
Development Plan (FDP)
Expected announcements
Oil Ministry has suggested for 50:50 subsidy sharing
between GoI and upstream vs adhoc basis currently
Clarity on LPG subsidy quantum. Nation-wide
implementation by April-2015 for all LPG customers
seems aggressive to us

Impact
Reduction in diesel under-recoveries
of `628bn on annualized basis
Incremental PAT of `35bn for ONGC
and `4bn for OIL in FY16

Resolution of pending operational

issues with DGH and monetization of
discoveries
Impact
To reduce subsidy burden on ONGC
and OIL
To reduce LPG subsidy in the
medium to long term

Source: MoPNG, Systematix Institutional Research

Nov 2014

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Table 6: Upstream PSUs oil business would report losses at current crude price and
at fixed subsidy at USD56/bbl
USD/bbl
Ups tream PSUs oil busi nes s woul d i ncur
l oss (a round USD10.8/bbl for ONGC a nd
USD5.7/bbl for OIL) a t crude pri ce of
USD78bbl a nd s ubsidy s hare a t USD56/bbl
Opex a nd DD&A expens es a s s umed on
bl ended basis bas ed on a ctua l numbers
reported by ONGC a nd OIL i n FY14

Current crude price

Gross realisation
Fixed subidy
Net realisation
Cess
Royalty
Opex
EBITDA
DD&A
EBIT/PBT
Tax
PAT

ONGC

OIL

77.7
77.7
62.3
15.4
10.3
1.7
9.4
(5.9)
10.5
(16.4)
(5.6)
(10.8)

77.7
77.7
56.0
21.7
10.3
3.4
11.6
(3.5)
5.1
(8.6)
(2.9)
(5.7)

Source: ONGC, OIL, Systematix Institutional Research

Lower upstream subsidy burden to increase net crude oil realisation

We expect net realisation of ONGC/OIL to increase substantially in FY16 with support
of decline in the fuel under-recoveries (our estimate of `663bn for FY16 vs `1,399bn
in FY14) on the back of diesel de-regulation and fall in crude oil prices.
We base our FY15E/FY16E upstream subsidy share conservatively at 65% (See Table
14 on page 8) based on fuel subsidy budget estimate of `634bn for FY15 and
adjustment for `350bn for carry-forward of 4QFY14 under-recoveries. With declining
under-recoveries, we model FY15E/FY16E blended upstream subsidy burden at
USD52.7/USD42.3 per barrel and net realisation at USD49.9/USD57.7 per barrel.
With rationalisation of subsidy sharing at 50:50 between GoI and upstream, the
FY16E upstream subsidy burden could further decline to USD32.6/bbl and net
realisation would increase to USD67.4/bbl.
Table 7: Under-recoveries and subsidy sharing among GoI, upstream and OMCs

We expect gross under-recoveries to halve

down to `663bn i n FY16 vs `1,399bn FY14
on ba ck of di es el de -regul a ti on

Cons equentl y FY16E ups trea m s ubs i dy

burden woul d a l s o decl i ne by 36% to
`431bn vs FY14 ups trea m s ha re even a t
hi gher s ubsidy s hare at 65% vs only 48% in
FY14

In `bn

FY13

FY14

FY15 E

Brent Crude (USD/bbl)

`/USD
Diesel
LPG
Kerosene
Total Under-recoveries
Subsidy sharing
Upstream
ONGC
OIL
Gail

111
54.2
921
396
294
1,610

108
60.2
628
465
306
1,399

102
60.5
117
428
286
831

601
494
79
28

670
564
87
19

540
455
70
15

431
363
56
12

332
279
43
9

GoI
OMCs
Subsidy sharing (%)
Upstream
ONGC
OIL
Gail
GoI
OMCs

1,000
9

708
21

291
0

232
0

332
0

37%
82%
13%
5%
62%
1%

48%
84%
13%
3%
51%
1%

65%
84%
13%
3%
35%
0%

65%
84%
13%
3%
35%
0%

50%
84%
13%
3%
50%
0%

FY16E
Upstream
Upstream
share at 65% share at 50%
100
100
60.0
60.0
0
0
393
393
271
271
663
663

Source: PPAC, ONGC, OIL, Systematix Institutional Research

Nov 2014

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Table 8: Sensitivity of FY16E gross under-recoveries to crude price and `/USD

Crude price (USD/bbl)
For every USD5/bbl decline in crude pri ce
a nd a t `/USD ra te of `60, FY16E gros s
under-recoveries decl i nes by `65bn a nd
vi ce-vers a

58
59
60
61
62

`/USD rate

90

95

100

105

110

502
518
533
549
564

565
582
598
615
631

628
646
663
681
699

691
710
728
747
766

754
774
793
813
833

Source: Systematix Institutional Research

Table 9: For every `5/cly/month hike in LPG price FY16E LPG under-recovery
reduces by `32bn
Quantum of price hike

LPG Under-recoveries

FY16 Base case

Scenario 1

No LPG price hike

Hike of `5/cyl/month

393
361

Scenario 2
Scenario 3
Scenario 4

Hike of `10/cyl/month
Hike of `15/cyl/month
Hike of `20/cyl/month

329
297
265

Source: Systematix Institutional Research

Table 10: Upstream net realisation to increase with decline in under-recoveries

USD/bbl

FY13

FY14

FY15 E

FY16E
Upstream
Upstream
share at 65% share at 50%

Led by l ower s ubsidy burden ONGCs net

rea l i s a ti on i s expected to i ncrea s e to
USD56.3/bbl in FY16 vs USD41/bbl i n FY14
Producti on growth a nd l ower s ubs i dy
woul d i ncrea s e OILs net rea l i s a ti on to
USD64.7/bbl i n FY16 vs USD47.1/bbl i n
FY14

Gross Realisation
ONGC
OIL
Subsidy
ONGC
OIL
Net Realisation
ONGC
OIL
Oil Sales (mmt)
ONGC
OIL

110.7
109.6

106.7
106.4

102.9
102.4

100.0
100.0

100.0
100.0

62.9
56.0

65.8
59.3

52.9
47.1

43.7
35.3

33.6
27.2

47.9
53.6

41.0
47.1

50.0
55.3

56.3
64.7

66.4
72.8

19.2
3.6

18.9
3.4

19.1
3.4

19.0
3.6

19.0
3.6

Source: ONGC, OIL, Systematix Institutional Research

Table 11: Upstream subsidy sharing mechanism suggested by Kirit Parikh (KP)
Committee (in October-2013)
Crude price (USD/bbl)
<80
80-120
>120

% of contribution

% retained by

of upstream PSUs

upstream PSUs

40% of price
25% of incremental price
50% of incremental price

60% of price
75% of incremental price
75% of incremental price

Source: Ministry of Petroleum and Natural Gas

Table 12: Upstream subsidy sharing mechanism suggested by ONGC

Crude price (USD/bbl)
<80
80-120
>120

% of contribution

% retained by

of upstream PSUs

upstream PSUs

40% of price
25% of incremental price
50% of incremental price

60% of price
75% of incremental price
75% of incremental price

Source: ONGC

Nov 2014

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Table 13: Crude realisation for upstream players under the two mechanisms
Crude price (USD/bbl)

ONGC s uggested formula provides stability

i n crude realis a ti on a t va ri ous crude oi l
pri ces a nd hence more fa vora bl e for
ups tream PSUs vs formula suggested by KP
commi ttee.

Mechanism by ONGC ( USD/bbl)

Mechanism by KP (USD/bbl)

Subsidy

Net realisation

Subsidy

Net realisation

65
75
85
95

0.0
8.5
17.0
25.5

65.0
66.5
68.0
69.5

26
30
33.3
35.8

39.0
45.0
51.8
59.3

105
115
125
135
145
155

34.3
43.3
52.3
61.3
70.3
79.3

70.8
71.8
72.8
73.8
74.8
75.8

38.3
40.8
44.5
49.5
54.5
59.5

66.8
74.3
80.5
85.5
90.5
95.5

Source: Systematix Institutional Research

Table 14: FY15 upstream subsidy sharing hinges on upon fiscal deficit target
`bn

Ba s ed upon FY15BE of fuel subsidy `634bn

a nd a djus tment of `350bn rel a ted to
ca rry-forwa rd of under-recoveri es from
4QFY14, we deri ve a t ups trea m s ubs i dy
s ha re a t `547bn or 66% of gros s underrecoveri es

FY15BE*

Total revenue receipts

Food subsidy

12,637
1,150

Fertiliser subsidy
Fuel subsidy
Total subsidy
Other expenditure
Total expenditure
Fiscal deficit

730
634
2,514
15,435
17,949
(5,312)

Fiscal deficit as % of GDP

FY15E fuel under-recoveries (A)
FY15BE fuel subsidy (B)
Roll over from 4QFY14 (C)
Balance available for FY15 i.e. GoI share (D = B-C)
Likely burden of upstream (A-D)

4.1%
832
634
350
284
547

Upstream subsidy share

GoI subsidy share

66%
34%

Source: Budget documents; Systematix Institutional Research

Note: *FY15 budget estim ates

Hi gher OPEC a nd Non-OPEC oil s upply a nd

a ppreciation of the US dollar led to a sharp
decl i ne i n Brent oi l pri ce to USD78/bbl
Lower l evel of crude prices does not seem
s us tainable as we believe that Saudi Arabia
woul d play a bala nci ng a ct by cutti ng oi l
s uppl y by a round 2mbpd

Nov 2014

Crude oil price could increase on potential oil supply cut from Saudi
Arabia
Brent crude oil price have declined to USD78/bbl from USD110/bbl since June-2014
due to abundant supply (OPEC + Non-OPEC oil supply has increased by almost 2mbpd
since Sep-2013) in the scenario of slowing demand growth. The appreciation of the
US dollar has also led to a fall in commodity prices in the last four months.
We expect oil price to increase as Saudi Arabia has scope to reduce oil supply by
around 2mbpd given ramp-up in Libyan and Non-OPEC oil supply and hence model
crude price of USD100/bbl in FY16 vs current level of USD78/bbl.

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Chart 1: Brent crude price declined to USD78/bbl (at four year low) on the back of
higher OPEC and Non-OPEC oil supply

Source: Bloomberg; Systematix Institutional Research

Chart 2: OPEC oil supply increased by 1mbpd since Nov-2013

led by production ramp-up at Libya

Chart 3: Non-OPEC oil supply also improves by 1.6mbpd

since Sep-2013

Source: Bloomberg; Systematix Institutional Research

Chart 4:Libyan oil supply increased by 0.64mbpd since Nov-2013

Chart 5: Saudi Arabian oil supply hiked by 0.1mbpd since

Nov-2013

Source: Bloomberg; Systematix Institutional Research

Nov 2014

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Higher gas price to boost earnings (add `4.1/share to ONGCs FY16E EPS
and `6.7/share to OILs FY16E EPS)

Every USD1/mmbtu increase i n ga s pri ce

woul d ra ise ONGCs EPS by `2.9/s hare and
tha t of OIL by `4.8/s ha re

GoI has announced new gas price of USD5.6/mmbtu (on NCV basis) with effect from
1st November 2014 with next reset date on 1st April 2015. The new formula considers
volume weighted annual average of North American, EU & FSU (excl. Russia) and
Russian gas prices with a quarter lag. We expect FY16E EPS of ONGC and OIL to
increase by `4.1/share and `6.7/share, respectively from gas price hike .
Table 15: Domestic gas price calculation (November 2014 to March 2015)
USD/mmbtu

Volume Weights

Price

Wt.avg.

42%
31%
21%
5%

4.2
9.4
10.9
3.8

1.8
2.9
2.3
0.2

Henry Hub
NBP
Russia
Canada
Gas price
Adjustments (Transport and processing charges)

7.1
1.5

Net gas price on NCV basis

5.6

Source: PIB, British Petroleum, Systematix Institutional Research

Table 16: Gas price hike to add `4.1/share to ONGC FY16E EPS and `6.7/share to
OILs FY16E EPS
Unit

Current gas price New gas price

Gas price
Royalty assumed @ 12.5%
Gas realisation net of royalty
Incremental gas realisation
Impact on ONGC's EPS
FY16E natural gas sales
Incremental revenue from gas price hike
Income tax
Incremental PAT
Incremental EPS
O/S shares
Impact on OIL's EPS

USD/mmbtu
USD/mmbtu
USD/mmbtu
USD/mmbtu

4.2
0.5
3.7

5.6
0.7
4.9
1.23

bcm
`mn
`mn
`mn
`/share
Mn

20
53,313
18,126
35,187
4.1
8,555

FY16E natural gas sales

Incremental revenue from gas price hike
Income tax
Incremental PAT
Incremental EPS
O/S shares

bcm
`mn
`mn
`mn
`/share
Mn

2
6,081
2067
4,013
6.7
601

Source: Systematix Institutional Research

Nov 2014

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Institutional Research

COMPANIES SECTION

Nov 2014

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Page 12

Institutional
Research
November
3,
2007

ONGC (ONGC IN)

Initiating Coverage
Industry

Oil & Gas

Valuation not factoring in upside from reforms

BUY (CMP: `391)

) bn; USD 54.1bn

Mkt Cap: `3,342
Oil and Natural Gas Corp. (ONGC)s valuation at 9.6x FY16E EPS is not factoring in
earnings upside from higher crude realisation led by fuel pricing reform. We
highlight here that the companys oil business would report loss of around
USD10.8/bbl at current crude price and fixed subsidy at USD56/bbl. Given the
tough situation, we expect GoI to clarify subsidy sharing mechanism by end of this
fiscal year, which would provide earnings visibility for upstream PSUs. Hence, we
initiate coverage on ONGC with a BUY rating and a target price of `461/share.
Price
Target Price
Expected share pric e return
Expected dividend yield
Expected total return

391
461
18.0%
2.4%
20.4%

Market Data
`3,342bn/US$ 54.1bn
8,555
`472/`264
24mn

Market Cap.
Share Cap. (mn)
52 Wk High/Low
Avg. Vol. (Weekly)

(Price Performance (RIC: ONGC.BO, BB:

ONGC IN)

Net crude realisation expected to increase to USD56.3/bbl in FY16 vs USD41/bbl in

FY14
Given our expectation of decline in under-recoveries to `831bn/`663bn in
FY15E/FY15E on the back of diesel price de-regulation and lower crude oil prices, we
expect a strong case for lower subsidy burden for upstream PSUs. Despite
conservatively assuming upstream subsidy sharing at 65% (based on FY15 budgeted
fuel subsidy of `634an and adjustment of `350bn for 4QFY14), we expect ONGCs
subsidy burden to fall to USD52.9/bbl in FY15 and USD43.7/bbl in FY16.
Consequently, we model net oil realisation at USD50/USD56.3 per barrel for
FY15E/FY16E vs only USD41/bbl in FY14.
Gas price hiked to USD5.6/mmbtu (to add `4.1/share to FY16E EPS)
The new gas price formula (based on volume weighted annual average of North
American, EU & FSU (excl. Russia) and Russian gas prices with a quarter lag) approved
by GoI would increase ONGCs gas price to USD5.6/mmbtu (from USD4.2/mmbtu
currently) with effect from 1st November-2014. We expect incremental PAT of `35bn
(or `4.1/share) for ONGC from gas price hike in FY16.
Poor track record to meet production guidance

Shareholding Pattern
(As on Sept 30 th, 2014)

(%)

ONGC has a poor track record of meeting its annual production guidance (FY13/FY14
standalone oil production was at 22.6mmt/22.2mmt vs management guidance of
23.6mmt/24.1mmt). Hence, we model flat standalone oil production of
22.2mmt/22.3mmt for FY15E/FY16E. We expect decline in standalone gas production
to 22.7bcm in FY15E (to factor poor show in H1FY15) and then improve to 23.5bcm
for FY16E.
Initiate coverage with a BUY rating

Financials (`Mn)
Net Sales
EBIDTA
PBT
PAT
EPS (`)
EBIDTA Mar gin (%)
PAT margin (%)
Price/Earnings (x)
EV/EBIDTA (x)
ROE (%)
ROCE (%)

Nov 2014

FY14

FY15E

FY16E

1,744,771 1,832,542 1,962,370

582,131
661,266
728,676
394,134
480,959
526,558
265,065
317,193
348,655
31.0
37.1
40.8
33.4%
36.1%
37.1%
15.2%
17.3%
17.8%
12.6
6.1
16.3%
18.5%

10.5
5.3
17.3%
19.7%

We value ONGC at `461/share (11x FY16E EPS + `13/share for investments). On the
back of reform-led increase in oil & gas realisation, we expect ONGCs EPS to grow at
a CAGR of 15% over FY14-FY16E with marked improvement in RoCE to 20% in FY16E
vs 18.5% in FY14. Rationalisation of subsidy sharing at 50:50 between GoI and
upstream would raise our FY16E EPS for ONGC to `45/share and consequently our
target price to `508/share (an upside potential of 30% from CMP).

9.6
4.7
16.8%
19.6%

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Table 17: SOTP based target price of `461/Share
SOTP

P/E

FY16E EPS

40.8

Multiple (x)
Value per share (`/share)
Investments (`/share)
Target price (`/share)
CMP
Upside

11
448
13
461
391
18%

Source: Systematix Institutional Research

Table 18: Sensitivity of ONGCs target price to gas price and `/USD
Oil realisation (USD/bbl)

Every USD5/bbl i ncrea s e i n net crude

rea lisation ONGCs ta rget price i ncrea s es
by `23/s ha re a t fi xed ga s pri ce of
USD5.6/mmbtu a nd `/USD ra te of `60

Gas price (USD/mmbtu)

2.6
3.6
4.6
5.6
6.6

41.3
313
339
365
391
417

46.3
336
362
388
414
441

51.3
359
385
412
438
464

56.3
383
409
435
461
487

61.3
406
432
458
484
510

66.3 71.3
429 452
455 478
481 504
507 530
533 557

7.6
8.6

443
470

467
493

490
516

513
539

536
562

559
586

583
609

Source: Systematix Institutional Research

Table 19: Key model assumptions

Net crude oi l rea l i s a ti on to i ncrea s e

s ubs ta nti a l l y to USD56.3/bbl i n FY16 vs
onl y USD41/bbl i n FY14

Sta nda l one oi l producti on expected to

rema in flat a t 22.2mmt over FY15E-FY16E
Sta ndalone ga s producti on expected to
decl ine i n FY15 to 22.7mmt based on poor
s how i n H1FY15 (-5% YoY decl i ne)
OVL oi l & ga s production could s urprise vs
our a s s umpti on of fl a t producti on over
FY15E-FY16E

Gross Realisation (USD/bbl)

Subsidy (USD/bbl)
Net realisation (USD/bbl)
`/USD rate
Net realisation (`/bbl)

FY13

FY14

FY15 E

FY16E

110.7
62.9
47.9
54.5
2,606

106.7
65.8
41.0
60.5
2,478

102.9
52.9
50.0
60.5
3,028

100.0
43.7
56.3
60.0
3,381

Subsidy (`bn)
Gas price (USD/mmbtu)
Production volume
Oil (mmt)
ONGC
JV

494
4.2

564
4.2

455
4.6

363
5.6

30.47
20.49
3.57

31.48
20.44
3.75

31.40
20.57
3.77

31.62
20.51
3.92

Condensate
OVL
Gas (bcm)
ONGC
JV
OVL

2.08
4.34
28.25
23.55
1.79
2.92

1.81
5.49
27.72
23.28
1.57
2.87

1.63
5.42
27.18
22.74
1.53
2.9

1.77
5.42
28.05
23.53
1.61
2.9

23.68
19.21
4.47

23.60
18.87
4.74

23.89
19.13
4.76

23.95
18.97
4.98

20.16

19.58

18.85

19.60

18.60
1.56

18.26
1.32

17.59
1.26

18.26
1.34

Sales volume
Oil (mmt)
ONGC
JV
Condensate
Gas (bcm)
ONGC
JV
Source: Company and Systematix Institutional Research

Nov 2014

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CONSOLIDATED FINANCIALS
Profit & Loss Statement
Y/E March (`mn)
Net Sales

FY13

FY14

FY15 E

FY16E

1,624,032 1,744,771 1,832,542 1,962,370

Sales Growth (%)

Balance Sheet
Y/E March (`mn)
Share Capital

FY13

FY14

FY15 E

FY16E

42,778

42,778

42,778

42,778

Reserves

1,482,502 1,678,732 1,905,534 2,165,001

Net Worth

1,525,280 1,721,510 1,948,311 2,207,779

10.2

7.4

5.0

7.1

24,585

25,309

24,440

26,222

Statutory Levies

256,835

261,893

288,468

306,213

Debt

204,508

Other Expenses

793,855

875,438

858,368

901,258

Total Current Liabilities

804,785 1,071,717 1,019,571 1,059,187

EBITDA

548,757

582,131

661,266

728,676

Total Equity & Liabilities

2,534,573 3,249,108 3,406,891 3,695,975

Net Block

1,249,653 1,557,756 1,720,557 1,905,809

Employee cost

EBITDA (%)

33.8

33.4

36.1

37.1

Depreciation

231,399

250,690

228,176

251,802

54,900

68,937

63,559

62,124

Investments

4,838

6,243

12,768

12,441

127,519

130,476

159,074

172,006

35

33

33

33

239,901

266,530

321,886

354,552

2,295

(1,465)

(4,693)

(5,896)

Other Income
Interest
Tax
Tax Rate (%)
Adj usted PAT
Extraordinary/prior period Items
Reported PAT
PAT Growth (%)

Cash Flow Statement

Y/E March (`mn)

CWP

538,270

462,737

47,459

47,459

47,459

Other non-current asset s

214,307

365,234

362,303

362,303

Curr. Assets

651,935

740,389

813,836

892,668

Debtors

153,956

160,284

196,880

207,618

Cash & Bank Balance

196,191

244,801

272,292

332,497

Inventory

127,804

148,015

137,071

144,936

Loans and advances

173,985

187,290

207,594

207,617

265,065

317,193

348,655

(13.9)

9.4

19.7

9.9

Total Assets

FY14

FY15 E

FY16E

Ratio
Y/E March

PAT

243,164

288,467

321,886

354,552

Depreciation

213,321

233,219

180,810

196,684

CEPS (`per share)

2,227

-31,014

-68,072

-27,612

BV (`per share)

458,713

490,673

434,624

523,624

DPS (`per share)

Cash Flow from Operation

Payout %

4.7

EV/Sales

2.1

2.0

1.9

1.8

Price/Book Value

2.2

1.9

1.7

1.5

109,711

EV/EBITDA

Debt Raised

-2,678

247,223

-16,872

Investment

7,966

651

-110,021

-97,624

-95,084

-95,084
55,579
60,206

Opening Cash Bal.

278,914

196,191

244,801

272,292

Add: Net Cash

-82,724

48,611

27,490

60,206

Closing Cash Bal.

Nov 2014

196,191

244,801

272,292

332,497

9.5

9.6

81,032

27,490

9.5

5.3

-82,922

58,414

9.5

10.5

P/E

24,373

48,611

9.5

6.1

-406,936

-18,718

63.7
258.1

12.6

-268,077

-2,364

58.2
227.7

6.1

-615,626

-82,724

58.2
201.2

13.8

-422,630

Net Cash Flow

53.2
178.3

23.3

Capex

Misc Expense & others

40.8

FY16E

Valuation (x)

Dividend Paid

FY16E

37.1

25.6

516,647

FY15 E

31.0

FY15 E

-6,977

349,110

-10,000

FY14

28.3

30.7

-85,514

532,704

FY13

FY14

42,031

447,003

2,534,573 3,249,108 3,406,891 3,695,975

33.6

-11,710

Operating Cash Flow

Equity Raised

487,737

FY13

Inc/(Dec) in WC

Free Cash Flow

429,009

21,282

EPS (`per share)

Others

439,009

397,397

242,196

FY13

455,881

Dividend Yield (%)

2.4

2.4

2.4

2.4

FY13

FY14

FY15 E

FY16E

RoE

16.8

16.3

17.3

16.8

RoCE

20.8

18.5

19.7

19.6

Profitability Ratio (%)

Turnover Ratios

FY13

FY14

FY15 E

FY16E

Debtors (Days)

34

33

39

Fixed Asset Turnover (x)

0.9

0.8

0.7

0.7

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Institutional Research
Systematix

Institutional
Research
November
3,
2007

Oil India (OINL IN)

Initiating Coverage
Industry

Oil & Gas

Favorable reforms; rising production

BUY (CMP: ` 588)

Mkt Cap `354bn; USD5.7bn

Price
Target Price
Expected share pric e return
Expected dividend yield
Expected total return

588
734
24.7%
4.6%
29.3%

Market Data
`354bn/US$ 5.7bn
601
`669/ `439
2mn

Market Cap.
Share Cap. (mn)
52 Wk High/Low
Avg. Vol. (Weekly)

(Price Performance (RIC: OIL.BO, BB:

OINL IN)

Oil India Limited (OIL)s valuation at 8x FY16E EPS is not factoring in earnings upside
from higher crude realisation led by fuel pricing reforms and increase in oil & gas
production. We highlight here that the companys oil business would report loss of
around USD5.7/bbl at current crude price and fixed subsidy at USD56/bbl. Given
the alarming situation, we expect GoI to clarify subsidy haring mechanism by end
of this fiscal year, which would provide earnings visibility for upstream PSUs.
Hence, we initiate coverage on OIL with a BUY rating and target price of
`734/share.
Net crude realisation expected to increase to USD64.7/bbl in FY16 vs USD47/bbl in
FY14
Given our expectation of decline in under-recoveries to `831bn/`663bn in
FY15E/FY15E on the back of diesel price de-regulation and lower crude oil prices, we
expect a strong case for lower subsidy burden for upstream PSUs. Despite
conservatively assuming upstream subsidy sharing at 65% (based on FY15 budgeted
fuel subsidy of `634an and adjustment of `350bn for 4QFY14), we expect OILs
subsidy burden to fall to USD47.1/bbl in FY15 and USD35.3/bbl in FY16.
Consequently, we model net oil realisation at USD55.3/USD64.7 per barrel for
FY15E/FY16E vs only USD47/bbl in FY14.
Gas price hiked to USD5.6/mmbtu (to add `6.7/share to FY16E EPS)
The new gas price formula (based on volume weighted annual average of North
American, EU & FSU (excl. Russia) and Russian gas prices with a quarter lag) approved
by GoI would increase OILs gas price to USD5.6/mmbtu (from USD4.2/mmbtu
currently) with effect from November 2014. We expect incremental PAT of `4bn (or
`6.7/share) for OIL from gas price hike in FY16.
Oil & gas production expected to grow at CAGR of 3% over FY14-FY16E

Shareholding Pattern
(As on Sept 30 th, 2014)

(%)

The blockades in Assam has severely impacted oil & gas drilling and production
activities of OIL over FY12-FY14. Consequently, the oil production has declined to
3.5mmt in FY14 (vs 3.9mmt in FY12, which is a decline of 9.8% over the same period).
With normalization of situation in the region, we expect oil and gas production to
grow at CAGR of 3% over FY14-FY16. Hence, we model oil production of
3.5mmt/3.7mmt and gas production of 2.8bcm/2.8bcm for FY15E/FY16E.
Initiate coverage with a BUY rating

Financials (`Mn)

FY14

FY15E

FY16E

Net Sales
EBIDTA
PBT
PAT
EPS (`)
EBIDTA Mar gin (%)
PAT margin (%)

91,267
35,416
44,104
29,813
49.6
38.8%
32.7%

114,397
53,462
50,078
32,782
54.5
46.7%
28.7%

138,988
70,855
66,996
44,217
73.6
51.0%
31.8%

Price/Earnings (x)
EV/EBIDTA (x)
ROE (%)
ROCE (%)

11.9
9.5
14.9%
16.8%

10.8
6.0
15.3%
16.3%

8.0
4.5
19.2%
20.5%

Nov 2014

We value OIL at `734/share (9x FY16E EPS + `72/share for investments). On the back
of reform-led increase in oil & gas realisation, we expect OILs EPS to grow at CAGR of
22% over FY14-16E with marked improvement in RoCE to 20.5% in FY16E vs 16.8% in
FY14. Rationalisation of subsidy sharing at 50:50 between GoI and upstream would
increase our FY16E EPS for OIL to `82/share and consequently our target price to
`812/share (an upside potential of 38% from CMP).
Royalty issue: ONGC is contesting case vs Gujarat governments plea to pay royalty
on gross realisation. If Supreme Court asks upstream companies to pay royalty on
onshore production at gross realisation it would impact OIL's FY16E PAT by 14%.

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Table 20: SOTP based target price of `734/Share
SoTP

P/E

FY16E EPS

73.6

Multiple (x)
Value per share (`/share)
Investments (`/share)
Target price (`/share)
CMP
Upside

9
662
72
734
588
25%

Source: Systematix Institutional Research

Table 21: Sensitivity of OILs target price to gas price and `/USD rate
Gas price (USD/mmbtu)
57
58
59
60
61

2.6
586
603
621
639
657

3.6
616
634
652
670
689

4.6
646
665
683
702
721

5.6
676
695
714
734
753

6.6
706
726
746
765
785

7.6
736
756
777
797
817

8.6
766
787
808
829
849

62
63

674
692

707
725

740
758

772
792

805
825

838
858

870
891

FY13

FY14

FY15 E

FY16E

109.6
56.0
53.6
54.4
2,915

106.4
59.3
47.1
60.5
2,850

102.4
47.1
55.3
60.5
3,346

100.0
35.3
64.7
60.0
3,879

79
3.7

87
3.7

70
4.7

56
5.6

3.70
3.64
0.04

3.50
3.45
0.04

3.51
3.46
0.04

3.72
3.66
0.04

Condensate
Gas (bcm)
OIL
JV
Sales volume
Oil (mmt)

0.02
2.64
2.64
0.00

0.02
2.63
2.63
0.00

0.02
2.76
2.76
0.0

0.02
2.78
2.78
0.0

3.68

3.47

3.47

3.69

OIL
JV
Condensate
Gas (bcm)
OIL
JV

3.62
0.04
0.02
2.08
2.08
0.00

3.42
0.04
0.02
2.09
2.09
0.00

3.42
0.04
0.02
2.23
2.23
0.00

3.63
0.04
0.02
2.24
2.24
0.00

Every USD1/mmbtu increase i n ga s pri ce

woul d ra ise OILs target price i ncreases by
`32/s ha re a t `/USD ra te of `60
`/USD rate

Source: Systematix Institutional Research

Table 22: Key model assumptions

Net crude realisation expected to increase
to USD64.7/bbl in FY16 vs USD47.1/bbl i n
FY14 l ed by l ower s ubs i dy burden a nd
hi gher crude producti on

Oi l & ga s producti on to grow a t CAGR of

3% over FY14E-FY16E wi th norma l i za ti on
of s i tua ti on i n As s a m (key produci ng
regi on for OIL)

Gross Realisation (USD/bbl)

Subsidy (USD/bbl)
Net realisation (USD/bbl)
`/USD rate
Net realisation (`/bbl)
Subsidy (`bn)
Gas price (USD/mmbtu)
Production volume
Oil (mmt)
OIL
JV

Source: Company and Systematix Institutional Research

Nov 2014

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Table 23: Impact of royalty on gross realisation on OILs PAT

Unit

If pa i d on gros s rea l i s a ti on, roya l ty

pa yment would have 14% negative impact
on FY16E PAT of OIL a nd would l ower our
ta rget pri ce to `664/s ha re

FY15 E

FY16E

Gross realisation
Subsidy
Net realisation
Royalty on net @ 15.5%
Royalty on gross @ 15.5%

USD/bbl
USD/bbl
USD/bbl
USD/bbl
USD/bbl

102.4
47.1
55.3
8.4
15.9

100.0
35.3
64.7
9.8
15.5

Incremental royalty payout

Oil sales
Revenue loss
Tax @ 34%
Negative impact on PAT
Negative impact on EPS

USD/bbl
mn bbls
`mn
`mn
`mn
`/share

7.5
25
11415
3881
7534
13

5.7
27
9146
3109
6036
10

Base case EPS

% negative impact on EPS

`/share
%

55
-23%

74
-14%

Source: Systematix Institutional Research

Nov 2014

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STANDALONE FINANCIALS
Profit & Loss Statement
Y/E March (`mn)

FY14

FY15 E

95,252

91,267

114,397 138,988

0.1

-4.2

25.3

21.5

Employee cost

13,106

14,732

16,809

Statutory Levies

30,439

28,789

Other Expenses

10,001

12,331

EBITDA

41,707

Net Sales
Sales Growth (%)

EBITDA (%)
Depreciation

FY13

FY16E

Balance Sheet
Y/E March (`mn)
Share Capital

FY13

FY14

FY15 E

FY16E

6,011

6,011

6,011

6,011

Reserves

186,103

201,070

214,675 233,025

18,763

Net Worth

192,115

207,082

220,686 239,036

31,263

36,166

Debt

10,578

97,827

97,827

97,827

12,863

13,204

Total Current Liabilities and others

45,128

43,836

65,327

71,230

35,416

53,462

70,855

Total Equity & Liabilities

247,821

348,745

43.8

38.8

46.7

51.0

Net Block

49,949

54,787

383,840 408,093
54,182

53,257

30,772

42,772

8,376

11,770

14,605

14,925

CWIP

17,690

20,772

Other Income

19,528

21,146

14,155

14,000

Investments

18,571

114,566

114,566 114,566

Tax

16,939

14,291

17,296

22,778

Curr. Assets

161,611

158,620

184,320 197,498

32.1

32.4

34.5

34.0

9,027

4,657

35,893

29,813

32,782

44,217

121,329

115,437

6,443

9,687

6,268

7,616

35,893

29,813

32,782

44,217

24,812

28,839

35,496

42,907

4.1

-16.9

10.0

34.9

247,821

348,745

FY14

FY15 E

FY16E

Ratios
Y/E March

FY13

FY14

FY15 E

FY16E

59.7

49.6

54.5

73.6
98.4

Tax Rate (%)

Adj usted PAT
Extraordinary/prior period Items
Reported PAT
PAT Growth (%)

Cash Flow Statement

Y/E March (`mn)
PAT

FY13

Deferred Tax & others

Cash & Bank Balance

Inventory
Loans & advances and others
Total Assets

9,402

11,424

133,154 135,552

383,840 408,093

26,023

32,782

44,217

EPS (` per share)

5,671

11,770

14,605

14,925

CEPS (` per share)

69.1

61.5

78.8

-14,062

-10,331

BV (`per share)

320

344

367

398

30.0

21.5

27.3

36.8

28,244

Depreciation

Debtors

Cash Flow from Operation

19,853

27,463

47,387

59,142

DPS (` per share)

Inc/(Dec) in WC

-8,808

-876

13,507

-4,877

Payout %

Operating Cash Flow

11,045

26,587

60,894

54,265

Valuation (x)

-12,515

-19,279

-24,000

-26,000

-1,470

7,308

36,894

28,265

10,477

87,249

7,571

50.2

43.4

50.0

50.0

FY13

FY14

FY15 E

FY16E

P/E

9.9

11.9

10.8

8.0

EV/EBITDA

5.8

9.5

6.0

4.5

EV/Sales

2.5

3.7

2.8

2.3

Price/Book Value

1.8

1.7

1.6

1.5

-95,995

Dividend Yield (%)

5.1

3.7

4.6

6.3

-19,562

-20,894

-19,177

-25,867

FY13

FY14

FY15 E

FY16E

Misc Expense & others

14,959

16,439

RoE

19.4

14.9

15.3

19.2

Net Cash Flow

11,975

-5,893

17,717

2,398

RoCE

26.2

16.8

16.3

20.5

109,355

121,329

FY13

FY14

FY15 E

FY16E

11,975

-5,893

121,329

115,437

34.6

18.6

30.0

30.0

0.4

0.3

0.3

0.4

Capex
Free Cash Flow
Equity Raised
Debt Raised
Investment
Dividend Paid

Opening Cash Bal.

Add: Net Cash
Closing Cash Bal.

Nov 2014

115,437 133,154
17,717

2,398

133,154 135,552

Profitability Ratio (%)

Turnover Ratios
Debtors (Days)
Fixed Asset Turnover (x)

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