Oil and Natural Gas Corporation (ONGC),

    FAVOURABLE regulatory norms are set to unshackle Oil and Natural Gas Corporation (ONGC), which is also investing heavily to build its future. Its investments in the core E&P business, apart from new businesses such as petrochemicals and power, are set to bring it back to the growth track. Considering its stability, steady growth prospects and healthy dividends, ONGC appears attractive for long-term retail investors.

BUSINESS

State-owned ONGC is India's largest oil producer delivered 52.2 million tonne of oil equivalent production in India in FY10. Its wholly-owned arm ONGC Videsh (OVL) holds stake in 39 oil blocks in 15 countries of which 9 are producing blocks that produced 8.87 mt of oil equivalent in FY10.

    15 major fields operated by ONGC, which produce over 60% of the country's total oil, are over 30-year-old and suffer from a natural decline in production. The capital intensive oil recovery methods employed by the company has resulted in arresting the natural decline and improving the recovery factor by over 6 percentage points in the last decade. Its another arm Mangalore Refinery and Petroch emicals (MRPL) operates a 12.5 mt per annum standalone refinery on India's western coast.

GROWTH DRIVERS

The upward price revision in the 48.5 million metric standard cubic metre per day (mmscmd) gas, ONGC was selling under administered pricing mechanism (APM) is a direct booster to the company's bottom line. While its oil revenues are subject to subsidy sharing, there is neither any revenue nor profit sharing on ONGC's gas business. In FY11, this alone will add Rs 3,500 crore to the company's bottomline, over 15% of its

FY10 consolidated profit. Further, the government has allowed market-driven pricing for any incremental gas production from the nominated fields. Considering the gas being sold from ONGC's C-series blocks in the western offshore is priced at $5.3 per mmbtu, incremental production from nominated fields too can fetch a higher rate compared to the existing $4.2. Cairn India, which is to begin production from its Rajasthan fields, also proves good for the company, which holds 30% in it. The output from this field, which stands over 60,000 barrels per day, is expected to touch 210,000 bpd by 2012. Despite stagnant production, the company has been enhancing its reserve pools.

    The company is investing to expand its revenue base. Its 1.4 mt petrochemical complex in Dahej under the name ONGC Petro-additions (OPaL) is expected to commence operations by March 2013. Its Tripura Power Project, which will help it monetise local gas reserves will come on-stream by 2012. It has tied up with its subsidiary MRPL to set up another petrochemical complex in Mangalore, which is scheduled to commence operations by end 2012. It is also investing in shale gas, coal-bedmethane (CBM) projects apart from developing marginal fields and nonconventional energy sources such as wind and solar power. In the last three years the company has completed a capex of over Rs 63,000 crore and expects to invest another Rs 26,500 crore in FY11. The current oversupply situation in the international crude oil market could put pressure on its prices.

FINANCIALS

For the past seven years the company has been required to share a part of its revenues from the sale of oil from fields awarded to it on nominated basis. This has aggregated to a discount of nearly Rs 100,000 crore over all these years. At a time when ONGC's production has been stagnating, this resulted in a muted profit growth, which remained stagnant for the past four years. The company has always remained a debtfree cash company paying generous dividends. Its FY10 consolidated profit, at Rs 19,735 crore, was 2% lower from the previous year as its interest and depreciation rose while other income came down.

VALUATION

The current market price is 13 times ONGC's earnings for FY10, which is in line with its peers. The APM gas price revision is expected to add Rs 17 to its FY11 EPS, which will boost its share price. If the government accepts a subsidy sharing formula for ONGC's oil revenues, it will improve its profit visibility. Better profit visibility can lead to an improvement in its valuation. FY13 onwards, the company will also have revenues from its petrochemical and power ventures to augment the oil and gas business.