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ONGC: Drilling new Highs

May 14, 2003

The dismantling of APM (administered pricing mechanism) came as cheers to ONGC. The net profit of ONGC for FY03 rose to about Rs 104 bn, an increase of over 68% as compared to FY02. It should be noted that earlier it had to sell crude at subsidized rates (fixed at $16 per barrel). Post APM it is allowed to sell the same at international rates. Backed by market pricing and higher crude, natural gas and other value added products output, ONGC has benefited. The production of crude oil by ONGC crossed the 26 million tonne (MT) mark, which was about 5% higher than the last year. The increase came mainly from Bombay high. The re-development projects carried out in 2001 can thus be seen as yielding fruits. In FY03, the production of natural gas at 24.3 billion cubic meter (BCM) and other value added products (3.8 MT) were the highest ever figures.

If we go back to history, we observe that the net profits of ONGC have risen at a CAGR of about 31% from FY97 to FY03. The profits of ONGC are the highest amongst all the private and public sector companies in India and it is the major contributor to the exchequer of India. Globally, it is the fifth largest Oil and Gas Company in terms of profit.

On the discovery front, it has made some noticeable discoveries in FY03. The oil and gas find at Vasai west is expected to be around 240 m barrels of oil plus oil equivalents, whereas in case of Laipling-gaon in Assam (oil and gas), it is estimated to be around 100 m barrels. At another discovery of gas made in Rajasthan, the testing has indicated presence of sweet gas with more than 7000 kcal/ m3 calorific value. It has also discovered oil and gas in two blocks in Krishna-Godavari offshore basin. Apart from this, it has discovered oil at Banamali in Assam. In all these cases, seismic survey and exploratory drilling have been accelerated.

In a continuous effort to become a global player, its wholly owned subsidiary ONGC Videsh Limited (OVL), has made certain achievements in FY03. It concluded the acquisition of 25% stake in greater Nile project in Sudan oil fields. Consequently, ONGC is set to receive 3 m tonnes per annum of crude as a result of this deal. It has also acquired 49% stake in two oil blocks in Libya. It is in talks to acquire equity stake deals in other global fields of Myanmar, Iran, Iraq, South Korea, US and Kazakhstan. The gas property in Vietnam (OVL's 45% stake) started its commercial production in Dec'02, marking the realization coming from hydrocarbons. The firm is in the process of looking at acquiring gas blocks off Tasmania.

ONGC's acquisition of MRPL, having a refining capacity of 9.7 m tonnes per year, marked the entry of oil and gas exploration major into downstream business of refining of petroleum products. This may add stability to the business, which currently get its revenues from the exploration business. It was eyeing a strategic stake in HPCL, but could not bid because of the regulatory requirements (PSUs are not allowed to bid for HPCL disinvestment). It got a license in FY03 to set up 600 retail outlets. Thus the company is trying to become a fully integrated company.

In the government's initiative policy to attract private players in the exploration business i.e. NELP (Read NELP: Will the dream materialize?), ONGC has competed with the private and international players and has bagged 37 out of 70 blocks offered till now in the three rounds of NELP. In the third round it was been awarded 13 out of the 23 blocks. It bagged two methane blocks and two more in consortium with Oil India limited out of the five blocks offered.

It plans to invest aggressively into deep sea drilling, an activity, which involves high cost and high risks. In 2003-04, ONGC is planning to launch retail marketing of transportation fuels, in addition to further upsides in exploration, production and refining. It has plans in place to double its reserves, from 5.8 bn tonnes of oil and oil-equivalent gas, to 12 bn tonnes in a period of 20 years. It is also targeting to improve the recovery level of crude oil from the current 26% to 40%. It plans to source 20 m tonnes per year of oil and gas from equity assets abroad in future.

All in all, the future looks good for this Oil and Gas giant. The only dampening factor is that its management is in government hands (over 96% stake) and therefore, its focus may see changes from time to time and therefore put pressure on its resources. At Rs 374 the stock is trading at 5.1x FY03 unaudited earnings.

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