Dehradun-based ONGC is the country's largest oil and gas exploration and production company. ONGC produces around 69 per cent of the country's crude oil that caters to around 30 per cent of the country's total demand and around 62 per cent of its natural gas. It is also the country's fourth largest company by market cap (December 16, 2013) and the largest money maker for the government.
ONGC has a strong resource base of drilling rigs both owned and chartered-hired. It has hundreds of offshore and on-land installations and well platforms. It also has its own large fleet of work over rigs, stimulation units, hydro-frac units, logging units, etc. It also owns multi-support vessels (MSVs), seismic survey units and stimulation service vessels.
Strengths
Being the biggest PSU company has its own advantages. ONGC is involved in exploration in 26 sedimentary basins of the country. It owns and operates over 11,000 kilometres of pipelines in the country and its international subsidiary ONGC Videsh has ongoing projects in 15 countries. Among the biggest drivers for ONGC at present is the doubling of gas prices from current levels of $4.2/mmbtu to $8.4/mmbtu. The gas price hike is expected to be notified by April 2014. This could potentially have a big impact on ONGC's earnings as gas accounts for 20 per cent of the company's sales. According to HDFC Securities, of the $4.2 price hike, about $2/mmbtu could flow out as subsidy while the balance $2.2 could be retained. That could add as much as ₹7 per share to ONGC's FY15 earnings.
Going against the nature of its industry, even though ONGC's major fields like the Mumbai High are mature, it has been able to maintain production levels by way of Improved Oil Recovery (IOR) and Enhanced Oil Recovery (EOR). By doing this the company has been able to maintain a reserve replacement ratio of more than one-an important metric to gauge the long term viability of exploration companies.
Losses on account of diesel administered pricing are expected to be ₹67,300 crore this financial. At the moment, diesel has the highest under-recovery burden for oil companies. But recent increase in diesel price has alleviated the situation somewhat. This year's losses on account of diesel are still significantly lower than the ₹91,500 crore under-recovery seen in FY13. Further diesel price hikes will have a positive impact on both the company's earnings and the market sentiments.
Concerns
Being one of the biggest revenue generators for the government also has its downsides. ONGC has to contend with declining output from its wells, with stagnant production being another concern. Both oil and gas production has remained flat for about 10 successive quarters now. Production in the latest quarter too declined 1.5 per cent over the previous year. Ongoing improved and enhanced oil recovery (IOR/EOR) and other development projects is estimated to add 4-5 mmtoe of crude oil (million metric tonne of oil equivalent and 12-13 mmscmd of gas over the next couple of years.
Subsidy sharing touched ₹13,800 crore levels, which were up 12 per cent over the previous year, similar to what the company has been paying for the last five quarters. Given the tight fiscal situation and the government's ad-hoc sharing policy so far, ONGC's subsidy burden has a likelihood of being higher in the current financial than in FY13.
Valuation
ONGC trades at ten times its earnings. The stock could remain under pressure till the Government notifies the increase in gas price. Production volume and subsidy sharing concerns will also continue to linger in the case of ONGC. Buy for the long term.
This article was originally published on March 31, 2014.
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