Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2019 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.

Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
ONGC: Applying the margin of safety - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks


Login Failure
(Please do not use this option on a public machine)
  Sign Up | Forgot Password?  

ONGC: Applying the margin of safety

Sep 29, 2008

We have updated our estimates for ONGC based on its recently published annual report for FY08. Following are the key observations from the exercise. Valuation drivers
We try to estimate ONGC’s 2P reserves balance (proved + probable) and the realisations (revenue) from them. Since realisations are denominated in US dollars, the rupee dollar exchange rate is used to convert them into rupees. We then estimate the earnings from the total rupee realisations. Finally, we project the present value of the earnings.

ONGC’s reserves balance, realisations and the movement of the rupee in FY08 were more or less in line with our estimates. However, earnings margins deteriorated on the back of higher costs for the company in terms of rig costs, finding costs and lifting costs. The present value factor also deteriorated to accommodate the receding production timelines.

Estimate vs. actual for FY08

Driver FY08 estimates Actual Impact on ONGC
Balance oil reserves (2P) 464 mtoe 453 mtoe Marginally negative
Balance gas reserves (2P) 447 mtoe 440 mtoe Marginally negative
Realisation from crude oil US$ 55.3 / barrel $52.9 Marginally negative
Realisation from crude oil US$ 2.5 / mbtu $2 Marginally negative
$/ Re exchange rate Strong rupee Strong rupee Neutral
Margins 34% 31% Negative
Present value factor 48% 44% Negative

Applying the ‘margin of safety’ to valuation drivers
“Introduce a margin of safety into calculations - somewhat as an engineer does in his specifications for a structure.” – Benjamin Graham.

It is clear from the above description that we estimate many factors to arrive at ONGC’s valuations. Since future estimates are bound to be uncertain, actual figures often deviate from the values originally taken. To safeguard against this, we take conservative figures while projecting the valuation drivers. They provide the cushion that negative movements in a few valuation drivers will be offset by positive trends in others.

It is also vital to include a margin of safety while projecting the future performance of a business like upstream oil & gas, which involves great operational risk. Conservative estimates also build in a margin of safety against the vagaries of the stock markets of the kind we have witnessed over the past year.

To Read the Full Story, Subscribe or Sign In
To Read the Full Story, Subscribe or Sign In

Get the Indian Stock Market's
Most Profitable Ideas

How To Beat Sensex Guide 2019
Get our special report, How to Beat Sensex Nearly 3X Now!
We will never sell or rent your email id.
Please read our Terms


Aug 19, 2019 03:35 PM