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ONGC: Research meeting excerpts - Views on News from Equitymaster
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ONGC: Research meeting excerpts
Nov 9, 2004

Following are the excerpts from our research meet with Oil and Natural Gas Corporation, the country’s largest exploration and production company, which accounts for over 80% of oil and gas production. The focus of the meet was to understand the various measures being taken by the company to reduce the country’s dependence on imports in the face of increasing demand and stagnant domestic crude production. Company Background:

ONGC is India’s largest upstream exploration and production company accounting for nearly 85% of oil and natural gas production. As of FY04, the company’s ultimate domestic reserves accretion accounted to 346.8 MMT (million metric tonnes) of oil and oil equivalent gas. ONGC’s subsidiary, OVL has acquired stake in over 9 countries and plans to secure nearly 20 MMTPA of oil and oil equivalent gas by 2020 and is actively eyeing oil fields abroad.

Key impressions:

  • Plans for the Eastern coast: ONGC has been exploring in the Krishna Godavari Basin and is very optimistic about the fields. The gigantic finds by Reliance Industries in the adjacent fields have further strengthened expectations and the company is now set to explore into deep waters into the Eastern coast. Although exploration in five wells as of now have resulted in no substantial finds, the company plans to drill another 32 wells in the deep waters and shall spend nearly Rs 40 bn (12.5% of FY04 sales) towards the same.

  • Potential areas: The company found oil and gas in the Vasai fields in the Western offshore region to the tune of 6.2 MMT of oil (1.8% of existing reserves) and 3.2 BCM (1.2% of existing reserves in billion cubic meters) of gas. Another region in the Western offshore holds nearly 4.6 MMT of oil and the production in these areas is likely to begin in FY07. Having said that, the company has been actively pursuing deepwater drilling and has been optimistic about the project with huge capex lined up for the same.

  • Activity in the producing fields: ONGC has been successful in its redevelopment efforts in the Mumbai Offshore, as the fields responded well to the IOR (improved oil recovery) and EOR (enhanced oil recovery) measures introduced by the company. To put things in perspective, oil production has actually increased by nearly 50,000 barrels per day in the field and is currently producing nearly 250,000 barrels of oil per day. Also, the company has a right to increase its stake in the Mangala fields in Rajasthan where recently Cairn Energy announced significant oil finds. Having said that, ONGC has also upped its stake in the Lakshmi and Gauri gas fields operated by Cairn Energy. This would add to the company’s existing production.

  • Overseas venture: ONGC Videsh (OVL) has been eyeing oil blocks in foreign lands aggressively and is currently pursuing some blocks in Venezuela and Ecuador. The recent statement regarding cost escalation in the Sakhalin project is more of a myth, as it is not a cost escalation but the costs that were to be borne in the second phase have been preponed and the company shall now be able to evacuate natural gas and oil at an earlier stage than expected. Further, the reserves are likely to beat expectations.

  • Natural gas pricing: The current natural gas prices as per the international prices is almost three times the prevalent price band of US$ 2.11 to US$ 3.11 per MMBTU (million British thermal units), the company has been suffering huge subsidies. The government is currently talking of a price hike in the near term and this could have a soothing impact on ONGC, which has to compensate for the differential between international pricing and the capped price of US$ 3.11 per MMBTU to its joint venture partners.

  • Capex: During FY05, ONGC has planned a capex of Rs 110 bn and this would include new field exploration, deep-water ventures and redevelopment plans. Also, the company is open to acquisitions in overseas fields.

At Rs 825, the stock is trading at a price to earnings multiple of 8.7 times annualized 2QFY05 earnings. Given the company’s focus on improving production from current fields and also the quest to increase overseas business, ONGC is likely to witness robust growth going forward. The company has planned to increase production from the current levels of 26 MMTPA of oil to nearly 28 MMTPA over the next three years. However, high cost deep-water projects, which are highly risky in terms of success, continue to remain a concern for the company.

We will be adding ONGC under our research coverage this week.

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