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ONGC : Lower realisations impact performance
Nov 22, 2014

Oil and Natural Gas Corporation Ltd (ONGC) has announced results for the quarter ending Septemer 2014. The topline registered 8.7% year on year (YoY) decline during the quarter while bottomline was down by 10.2% YoY. Here is our analysis of the results.

Performance summary
  • Topline for the quarter declined by 8.7% year on year (YoY) mainly due to lower gas production (decline led by PMT fields) and lower net realisations.
  • The operating profits for the quarter were down 10 % YoY with margins at 44.2% (versus 44.8% in 2QFY14.
  • The firm registered a decline of 10.2% YoY in the bottomline during the quarter with net profit margins at 26.7% versus 27.2% in 2QFY14.
  • Because of the subsidies, the company's gross sales declined by Rs 136 bn during the quarter while bottomline was impacted to the tune of Rs 76 bn.
  • The company has considered a contingent liability worth Rs 130 bn towards the differential in royalties between post discount and pre discount oil prices to state of Gujarat. It has also shown as deposit an amount of Rs 14.9 bn towards differential royalty with effect from February 2014
Financial snapshot
Rs m 2QFY14 2QFY15 Change (%) 1HFY14 1HFY15 Change (%)
Sales 223,120 203,611 -8.7% 415,303 421,081 1.4%
Other operating income 1,027 866 -15.7% 1,933 1,909 -1.3%
Total income 224,147 204,478 -8.8% 417,236 422,990 1.4%
Expenditure 123,818 114,191 -7.8% 247,705 244,061 -1.5%
Operating profit (EBDITA) 100,329 90,286 -10.0% 169,531 178,929 5.5%
Operating profit margin (%) 44.8% 44.2%   40.6% 42.3%  
Other income 14,830 13,609 -8.2% 26,791 22,561 -15.8%
Interest 0.9 1.4 55.6% 3 2.7 -10.0%
Depreciation 24,265 24,538 1.1% 47,590 50,161 5.4%
Profit before tax 90,892 79,356 -12.7% 148,729 151,326 1.7%
Profit before tax margins (%) 40.6% 38.8%   35.6% 35.8%  
Tax 30,254 24,907 -17.7% 47,930 49,060 2.4%
Profit after tax 60,639 54,449 -10.2% 100,798 102,267 1.5%
Net profit margin (%) 27.2% 26.7%   24.3% 24.3%  
No. of shares         8,555  
Diluted earnings per share (Rs)*         26.00  
P/E ratio (x)*         14.8  
*On trailing 12 months basis

What has driven performance in 2QFY15?
  • The standalone crude production for the quarter grew 2.1% YoY (1.15% YoY growth in 1HFY15). However, overall crude oil production for the quarter declined by 0.91% YoY (down 0.78% YoY in 1HFY15). Gas production from ONGC fields declined 8.4% YoY during the quarter (down 5.3% YoY in 1HFY15) while overall gas production declined by 8.6% YoY (down 5.5% in 1HFY15). The production of value added products dropped by 10.2% YoY during the quarter (down 7.7% YoY in 1HFY15). The gross realisations for the quarter stood at US$ 102.13 per barrel of crude (down 6.3% YoY). Net realisations in dollar also came down and stood at US$ 41.35 per barrel (versus US$ 44.86 per barrel in 2QFY14) due to sharing of under recovery burden). The net realisations in rupee per barrel for 2QFY15 stood at Rs 2,505, down 10.1% YoY.

    Cost breakup
    Rs m 2QFY14 2QFY15 Change (%) 1HFY14 1HFY15 Change (%)
    Cost of materials consumed 1,195 3,613 202.2% 1,980 2,893 46.1%
    as a % of sales 0.5% 1.8%   0.5% 0.7%  
    Employee benefit expenses 4,427 4,559 3.0% 10,324 8,626 -16.4%
    as a % of sales 2.0% 2.2%   2.5% 2.0%  
    Statutory levies 58,242 54,498 -6.4% 113,962 112,768 -1.0%
    as a % of sales 26.1% 26.8%   27.4% 26.8%  
    Other costs 39,248 32,397 -17.5% 85,051 62,374 -26.7%
    as a % of sales 17.6% 15.9%   20.5% 14.8%  
    Exploration costs w/off 20,707 19,125 -7.6% 36,389 57,400 57.7%
    as a % of sales 9.3% 9.4%   8.8% 13.6%  
    Total costs 123,818 114,191 -7.8% 247,705 244,061 -1.5%
    as a % of sales 55.5% 56.1%   59.6% 58.0%  

  • Lower net realisations pulled down the margins by 0.6% YoY. ONGC witnessed increase in input material cost, statutory levies which were offset to some extent by decline in other costs (all as a % of sales).

  • The bottomline for the quarter declined by 10.2% on the back of lower crude realisations and subsidy burden.
What to expect?
The company has notified two more discoveries during the quarter (total 10 discoveries in this fiscal year). In its board meeting, the company has decided on Phase III redevelopment of Mumbai High South at a capital investment of Rs 61 bn and integrated development of Mukta, Bassein and Panna formations in Western Offshore at a cost of Rs 46.2 bn. The management has maintained target (standalone) crude oil production and gas production at 23.5 MMT and 24 bcm and expects production to ramp up in the second half of the year from new projects.

Ageing fields remain a concern for the company. While diesel deregulation is positive, adhoc subsidy sharing mechanism remains a concern. The company has not seen much relief in subsidy burden despite easing crude prices this quarter.

Again, while gas prices have been revised upwards, the management believes that the quantum of increase is not good enough. Also, the gas prices going forward could go up or down based upon the likely gas price trends and formula suggested. A downward gas price movement will be negative for the company.

At current prices, the stock of ONGC is trading at a price to earnings multiple of 15 times. The stock price has risen by 61% in the year till date, due to ongoing reforms and divestment plans. We will update subscribers with the target price soon, incorporating the likely impact of latest events and interim numbers. Until then, we recommend not to buy the stock at the current price levels.

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