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ONGC: Street cautious on OVL's buy

Source : BUSINESS_STANDARD
Last Updated: Tue, Nov 27, 2012 19:33 hrs

The largest ever acquisition by ONGC Videsh Ltd (OVL) of $5 billion for 8.4 per cent stake in assets in North Caspian Sea not only increases its reserve base but also provides production upside visibility for OVL, albeit from FY14. The acquisition comes at a time when OVL’s productions from Sudan and Syria had been affected due to geo-political issues.

ONGC, the parent company of OVL, has been affected by lower production on the domestic front, too. Lowering of overall production estimates for FY13 and FY14 resulted in the stock losing more than 14 per cent on the bourses from its closing highs of Rs 293.35 on September 21.

Analysts, however, are cautious on OVL’s investment, looking at challenges posed by extreme climatic conditions at the fields and logistical issues that have already led to delays in the project and cost escalations (three times from $57 billion to $187 billion). This acquisition will also result in higher debt for ONGC, which is in the midst of a huge capacity expansion programme. Thus, analysts haven't made significant changes to their earnings estimates for ONGC, while their target price for the stock remains in range of Rs 260-300. Not surprisingly, the stock closed in the red at Rs 249.75 on Tuesday.

Deal and positives
OVL has agreed to buy US energy giant ConocoPhillips’s 8.4 per cent stake in the Kashagan oilfield (world’s biggest oilfield discovered since 1968) in Kazakhstan’s Caspian Sea for a consideration of $5 billion. This field is currently operated by an international consortium under the North Caspian Sea PSC, which apart from ConocoPhillips consists of ENI, Shell, Total, Exxon Mobil and KazMunaiGaz each holding 16.81 per cent stake while Inpex holds 7.56 per cent.

The field, discovered in year 2000, is being developed in three phases of which the first Phase was expected to be completed by 2005 but has been delayed by eight years and is now expected to commence production by the first half of 2013. The first phase will produce 370,000 barrels of oil equivalent per day (bopd), which is expected to reach 1.5 million bopd by the third phase.

This investment gains importance for OVL as it is yet to make further progress in its previous venture in Imperial Energy, Russia, where the company is in the process of selecting the right technology to exploit the reservoir. Production from its investments in Syria and Sudan has also been impacted on account of political unrest in the region. As a result OVL’s production estimates for FY13 and FY14 had been cut from 7.5 million tonnes (mt) and 8.6 mt to 6.9 mt and seven mt of the oil equivalent, respectively.

PROFITABILITY UNDER STRESS
In Rs crore FY12 FY13E FY14E
Net sales 151,608 167,530 172,522
% change y-o-y 28.9 10.5 3.0
Ebitda 57,770 57,438 61,326
Ebitda (%) 38.1 34.3 35.5
Adj net profit 25,288 28,654 29,854
% change y-o-y 23.3 -0.4 2.9
EPS (Rs) 32.9 33.1 34.5
PE (x) 7.6 7.5 7.2
E: Estimates
Consolidated financials
Source: Elara Capital

Valuations and concerns
Benefits of the latest investment will start from FY14 on commissioning of the first phase. However, the second phase of the production is expected to commence only in 2023 according to Alok Deshpande of Elara Capital, who feels that valuation of $6.3 per barrel of oil equivalent is reasonable. However, he adds, that OVL has paid $2.75 billion or 55 per cent for the Phase-1 reserves, while the rest is for the future development of other reserves, which is a risky proposition considering past delays and future challenges in such a complex project. The analyst remains cautious as $2.1 billion investment for acquiring Imperial energy in 2009 has not yielded desired results.

On the domestic front, ONGC’s production guidance that had been lowered from 27.5 mt to 27 mt for FY13 and from 32.1 mt to 29.1 mt for FY14, according to analysts, remains a bigger cause for concern.

Meanwhile, ONGC at a consolidated basis had cash and bank balances of Rs 27,900 crore and debt of about Rs 16,000 crore at the end of FY12. Sujit Lodha of Asian Market Securities feels that domestic capex on ageing fields will hinder the parent ONGC from making equity commitments. After a $1-billion foreign currency bond issue for acquiring Azeri, this acquisition will result in consolidated debt levels rising for the company, though it will still be in reasonable limits.



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