Oil & Natural Gas Corporation September 10, 2012
OVL has agreed to buy Hess Corporation’s 2.72% interest in the Azeri, Chirag and Guneshli (ACG) Fields in Azerbaijan and its 2.36% interest in the associated Baku– Tbilisi–Ceyhan (BTC) pipeline for US$1bn. The transaction, expected to close in the first quarter of 2013. ONGC is paying around 15% premium over BP- SOCAR deal (2011) and 10% premium to BP-Devon deal (2010) for the field. While the valuation at US$6.8/bbls (ex-pipeline) seems attractive prima-facie, however higher government take (68%), recent transaction multiples and mature nature of the field (1HCY12 production declines 11%) leaves limited value accretion potential for ONGC.
Deepak Pareek
[email protected] +91-22-66322241 Dhrushil Jhaveri
[email protected] +91-22-66322232 Rating Price Target Price Implied Upside Sensex Nifty
Accumulate Rs275 Rs301 9.5% 17,346 5,238
Valuation of the field: Given the fact that ONGC has also picked up stake in the pipeline, which was built with capex of US$3bn, we if exclude the value of the same ( US$71mn), the net value paid for the E&P operations is US$930mn. If we were to compare the same with BP’s stake sale in the field to SOCAR, the same is around 15% expensive. On 16th August, 2010, BP acquired Devon’s 3.29% interest (after pre-emption exercised by some of the partners) for US$1.1bn. Thus, on a comparative basis, the Devon-BP deal valuations were cheaper than ONGC deal.
Outlook: The acquisition is part of OVL’s strategy to increase its production to 20MMTPA by 2020 from current levels of 8.7MMTPA. The field would add around 10.6% production for OVL on gross basis. Given higher government take and declining production at fields, we do not expect material net take for ONGC on consolidated basis. However, Owing to headwinds in the form of uncertainty on subsidy-sharing mechanism and increasing under recoveries in the system. We believe things are unlikely to improve significant going ahead and upstream PSU will be a cash cow for sharing incremental subsidy burden.. We value ONGC at 9x FY2013E EPS arriving at a value of Rs301/share
(Prices as on September 10, 2012) Trading data Market Cap. (Rs bn) Shares o/s (m) 3M Avg. Daily value (Rs m) Major shareholders Promoters Foreign Domestic Inst. Public & Other Stock Performance (%) 1M 6M Absolute (2.5) (2.8) Relative (2.1) (3.8) How we differ from Consensus EPS (Rs) PL Cons. 2013 27.3 30.7 2014 33.5 32.7
2,349.4 8,555.6 798.6 69.23% 5.29% 11.67% 13.81% 12M 5.2 2.4 % Diff. ‐11.1 2.3
Price Performance (RIC:ONGC.BO, BB:ONGC IN)
Source: Bloomberg
Sep-12
Jul-12
May-12
Mar-12
Jan-12
Nov-11
Sep-11
(Rs) 350 300 250 200 150 100 50 0
Key financials (Y/e March) Revenues (Rs m) Growth (%) EBITDA (Rs m) PAT (Rs m) EPS (Rs) Growth (%) Net DPS (Rs) Profitability & Valuation EBITDA margin (%) RoE (%) RoCE (%) EV / sales (x) EV / EBITDA (x) PE (x) P / BV (x) Net dividend yield (%)
2011 1,176,106 15.7 484,364 224,560 26.2 15.7 8.7
2012 1,473,068 25.2 587,064 281,467 32.9 25.3 11.5
2013E 1,593,175 8.2 555,161 233,704 27.3 (17.0) 9.6
2014E 1,696,767 6.5 648,241 286,301 33.5 22.5 11.7
2011 41.2 20.7 17.3 2.0 4.9 10.5 2.0 3.2
2012 39.9 22.8 19.2 1.6 4.0 8.3 1.8 4.2
2013E 34.8 16.9 14.6 1.4 4.1 10.1 1.6 3.5
2014E 38.2 18.6 16.2 1.3 3.4 8.2 1.4 4.3
Source: Company Data; PL Research
PrabhudasLilladher Pvt. Ltd. and/or its associates (the 'Firm') does and/or seeks to do business with companies covered in its research reports. As a result investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of the report. Investors should consider this report as only a single factor in making their investment decision. Please refer to important disclosures and disclaimers at the end of the report
Event Update
ACG acquisition – premium valuation for a mature asset
Oil & Natural Gas Corporation
Exhibit 1:
Recent transactions
Date of transaction
Buyer
05 Jul 11 16 Aug 10
Seller Stake %
SOCAR
BP
1.65
BP
Devon
3.29%
Implied value Pipeline value Value Implied value of ONGC 2.7% at 1x investment (m$) of ONGC stake stake (m$) (m$) 485 802 71 873 1100
909
na
909
ONGC Premium/ acquisition (discount) (%) price (m$) 1,000 15% 1,000
10%
Source: Company Data, PL Research Exhibit 2:
ACG Fields and BTC Pipelines
Source: BP
September 10, 2012
2
Oil & Natural Gas Corporation
Key facts about the field
The BP operated ACG fields, located in the Caspian Sea approximately 100kms east of Baku, commenced production in 1997. ACG fields are third largest oil producing field in the world. The field is strategically important to government of Azerbaijan, which derives 85% of its oil revenues from the field. Oil contributes more than 50% of the Azerbaijan’s GDP.
Based on Chevron and BP’s filing, we gather that government take from the field stands at whopping 68% including the profit petroleum and royalty. The peak profit petroleum to be paid to the government stands at 80% in case of these fields,
Rationale cited by Hess for divestment is reshaping of its exploratory portfolio by divesting mature and small working interest.
This oil project offshore Azerbaijan in the Caspian Sea has seven operational platforms that have been completed over multiple phases of development. The BP (operator) began construction on another production platform in 2010.
Other shareholders in ACG fields include BP 35.8%, Chevron Corp. 11.3%, SOCAR 14.2%, Inpex 10.96%, Statoil 8.6%, ExxonMobil Corp. 8%, TPAO 6.8% and Itochu 4.3%. Russia's Lukoil pulled out of the project in 2003 selling all of its interest to Inpex. Devon sold its stake to BP in 2010, which was later further divested by BP to SOCAR.
This oil project has seven operational platforms that have been completed over multiple phases of development. BP (operator) began construction of another production platform in 2010.
ACG produced mostly Azeri Light, a medium-light and sweet crude that is valued for its high middle-distillate yield
The BTC pipeline system runs 1,110 miles from the ACG field in the Caspian Sea, via Georgia, to the Mediterranean port of Ceyhan, Turkey. From there the oil is shipped by tanker mainly to European markets. The BP-operated pipeline began exporting in July 2006 and has a capacity of 1.2 million bbl/d.
September 10, 2012
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Oil & Natural Gas Corporation
Exhibit 3: ACG production Start of production
Unit
Chirag
Nov 97
mmbl
From start of production till end of 2011 573.6
Central Azeri
Feb 05
mmbl
502.5
West Azeri
Dec 05
mmbl
435.2
90.6
72.4
East Azeri
Nov 06
mmbl
237.6
51.4
45.8
Deepwater Gunashli
Apr 08
mmbl
156.1
49.5
46.4
mmbl
1905
300.4
261.9
823
718
Total
2010
2011
34
27.2
74.9
70.1
kbpd Source: Company Data, PL Research Exhibit 4: Fiscal terms of the field
Profit petroleum
Contractor
Share-%
Share-%
Less than 16.75%
30
70
16.75% or more, but less than 22.75%
55
45
22.75% or more
80
20
RROR
Source: Company Data, PL Research Exhibit 5: Net government take based on BP filing
2010
2011
94
86
823
718
BP's share
35.3%
36.6%
BP's share (kbpd)
290.8
262.6
Profit petroleum
196.8
176.6
68%
67%
Production (bbl/day) Total production Azeri field (kbpd)
% profit petroleum Source: Company Data, PL Research
September 10, 2012
4
Oil & Natural Gas Corporation Income Statement (Rs m) Y/e March 2011 Net Revenue Raw Material Expenses Gross Profit Employee Cost Other Expenses EBITDA Depr. & Amortization Net Interest Other Income Profit before Tax Total Tax Profit after Tax Ex-Od items / Min. Int. Adj. PAT Avg. Shares O/S (m) EPS (Rs.)
2012
2013E
2014E
1,176,106 1,473,068 312,515 463,230 863,591 1,009,838 58,302 16,958 320,926 405,816 484,364 587,064 206,284 234,343 4,374 4,349 69,458 48,267 343,163 396,639 114,913 143,746 228,250 252,893 3,750 34,237 224,560 281,467 8,555.6 8,555.6 26.2 32.9
1,593,175 534,357 1,058,818 17,805 485,851 555,161 244,606 4,745 52,577 358,387 121,852 236,535 2,832 233,704 8,555.6 27.3
1,696,767 540,294 1,156,473 18,696 489,536 648,241 257,994 4,745 52,577 438,079 148,947 289,132 2,832 286,301 8,555.6 33.5
Cash Flow Abstract (Rs m) Y/e March C/F from Operations C/F from Investing C/F from Financing Inc. / Dec. in Cash Opening Cash Closing Cash FCFF FCFE
Key Financial Metrics Y/e March Growth Revenue (%) EBITDA (%) PAT (%) EPS (%)
2011
2012
2013E
2014E
296,097 (229,552) (87,802) (21,257) 223,842 202,586 318,351 318,351
477,072 (297,801) (116,481) 62,790 202,586 265,376 404,895 404,895
438,473 (292,915) (97,217) 48,341 265,376 313,717 378,971 378,971
491,795 (292,915) (118,866) 80,013 313,717 393,730 443,599 443,599
2011
2012
2013E
2014E
15.7 9.1 15.7 15.7
25.2 21.2 25.3 25.3
8.2 (5.4) (17.0) (17.0)
6.5 16.8 22.5 22.5
34.8 14.7 14.6 16.9
38.2 16.9 16.2 18.6
(0.1) (48)
(0.1) (48)
10.1 1.6 4.1 1.4
8.2 1.4 3.4 1.3
34.0 14.7 13.7 162.2
34.0 12.0 13.7 154.9
Profitability EBITDA Margin (%) PAT Margin (%) RoCE (%) RoE (%)
41.2 19.1 17.3 20.7
Balance Sheet Net Debt : Equity Net Wrkng Cap. (days)
— (57)
Valuation PER (x) P / B (x) EV / EBITDA (x) EV / Sales (x)
— (47)
10.5 2.0 4.9 2.0
Earnings Quality Eff. Tax Rate 33.5 Other Inc / PBT 20.2 Eff. Depr. Rate (%) 13.2 FCFE / PAT 141.8 Source: Company Data, PL Research.
September 10, 2012
39.9 19.1 19.2 22.8
Balance Sheet Abstract (Rs m) Y/e March 2011
2012
2013E
2014E
1,151,479 237,260 197,509 1,586,247 1,199,703 — 51,593 252,094 202,586 261,597 212,090 82,858 1,586,247
1,317,094 237,260 200,341 1,754,694 1,310,540 — 51,593 309,704 265,376 293,673 249,345 82,858 1,754,694
1,454,606 237,260 203,172 1,895,037 1,410,536 — 51,593 350,050 313,717 314,831 278,498 82,858 1,895,037
1,623,065 237,260 206,004 2,066,328 1,497,146 — 51,593 434,731 393,730 321,515 280,514 82,858 2,066,328
Quarterly Financials (Rs m) Y/e March Q2FY12
Q3FY12
Q4FY12
Q1FY13
Net Revenue EBITDA % of revenue Depr. & Amortization Net Interest Other Income Profit before Tax Total Tax Profit after Tax Adj. PAT
181,238 106,576 58.8 45,320 19 13,515 74,752 38,759 67,414 67,414
193,399 115,771 59.9 49,064 224 9,930 76,412 19,953 56,444 56,444
201,778 111,305 55.2 31,981 293 10,385 89,415 28,638 60,777 60,777
Shareholder's Funds Total Debt Other Liabilities Total Liabilities Net Fixed Assets Goodwill Investments Net Current Assets Cash & Equivalents Other Current Assets Current Liabilities Other Assets Total Assets
Key Operating Metrics Y/e March
226,163 141,596 62.6 32,782 65 14,420 123,169 36,747 86,422 86,422
2011
2012
2013E
2014E
Own Dom. Sale of crude oil (MMT) 22.9 Dom. Sale of Natural gas (MCM) 20,260 OVL-Oil Prod. (MMT) 6.8 OVL-Gas Prod. (BCM) 2.7 MRPL Thruput (MT) 12.6 Dom. Gross Realisations (US$/bbls) 89.5 Dom. Net Realisations (US$/bbls) 53.8 Subsidy burden (Rs m) 248,920 Subsidy burden (% of subsidy) 31.9 Dom. Realisations of NG (Rs/scm) 6.4 Source: Company Data, PL Research.
19.7 20,174 7.0 2.7 13.8 116.2 56.4 444,660 39.6 7.3
21.2 20,914 6.1 2.7 15.0 101.0 50.1 426,400 31.6 8.3
22.2 21,309 6.5 2.8 15.0 106.1 58.6 401,800 32.8 8.0
8.3 1.8 4.0 1.6
36.2 12.2 13.9 143.9
5
Oil & Natural Gas Corporation
Prabhudas Lilladher Pvt. Ltd. 3rd Floor, Sadhana House, 570, P. B. Marg, Worli, Mumbai-400 018, India Tel: (91 22) 6632 2222 Fax: (91 22) 6632 2209 Rating Distribution of Research Coverage
% of Total Coverage
60%
54.0%
50% 40% 30%
23.3%
22.0%
20% 10%
0.7%
0% BUY
Accumulate
Reduce
PL’s Recommendation Nomenclature
Sell
BUY
:
Over 15% Outperformance to Sensex over 12-months
Accumulate
:
Outperformance to Sensex over 12-months
Reduce
:
Underperformance to Sensex over 12-months
Sell
:
Over 15% underperformance to Sensex over 12-months
Trading Buy
:
Over 10% absolute upside in 1-month
Trading Sell
:
Over 10% absolute decline in 1-month
Not Rated (NR)
:
No specific call on the stock
Under Review (UR)
:
Rating likely to change shortly
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September 10, 2012
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