Pick of the week: ONGC

Broking firm Edelweiss has picked up Oil &Natural Gas Corpn (ONGC) as Edelweiss Star. It has recommended `Buy` with the target price of Rs 1,360. Broking firm has given investment rationale and technical view for investing in the stock. The same are as below:

Investment rationale:

Global crude demand likely to increase on global recovery. Moreover energy consumption in India from natural gas(currently ~9% due to shortage of gas) is set to rise due to production increase from 132mmscmd in FY10 to around 230 mmscmd in FY12E. Based on the demand of gas for power and fertilizers, we believe that an increase in thegas supplies can be easily absorbed by the country. In fact, we believe that India may have an appetite for more gas supplies, as the country’s GDP grows above 8.0% CAGR in the next decade which offers serious opportunities in oil & gas sector.

ONGC`s (Q,N,C,F)* earnings will be positively correlated to the increase in crude prices, as an increasing proportion of its international revenues (through OVL in a deregulated environment) will lead to higher realisations on crude. Also, OVL will be the major driver for volumes in the future and is also currently scaling up its production assets aggressively.

Significant APM gas price hike at one go is definitely positive for ONGC. This is a significant positive for the company and will support the substantial capital investmentsby it. Further, ONGC`s current exploration acreage offers significant opportunities for increase in reserves. Further, we are enthused by ONGC`s asset, new projects, and potential exploration upsides. However, till clear subsidy sharing mechanism emerges, uncertainty may prevail.

Investment Risks

Lower-than-expected crude prices will impact the company`s crude realizations and earnings. Additionally, the company`s net realizations also depend on the upstream (ONGC) subsidy sharing.

Higher-than-expected decline rates in its existing matured assets could impact its production, going forward.

ONGC has assets in countries like Sudan and Syria, which face geo-political risks. Therefore, any unfavorable incident could impact production.

Outlook and Valuations

Our outlook on ONGC has improved due to increase in gross crude realisation and recent correction in stock price. On our FY11E and FY12E EPS estimate of Rs. 105 and 129, the stock is currently trading at a P/E of 11.3x and EV/EBITDA of 4.9x on FY11E basis and at a P/E of 9.2x, and EV/EBITDA of 4.3x on FY12E basis. Given these attractive valuations and its growth prospects, we believe the stock offers upside potential in the near term.

Source: Myiris news - Live News - Pick of the week: ONGC

PMO favours joint mining by NTPC, RPower in Jharkhand

THE prime minister’s office has recommended that NTPC and Reliance Power should jointly mine adjacent coal blocks in Jharkhand to help them extract about 200 million tonnes of additional coal that would have been lost if the mines were delineated and drilled independently, government and company officials said. The proposal also has the backing of Parliament’s standing committee on coal. 

NTPC chairman and managing director Arup Roy Choudhury told ET that the company has found merit in the proposal. “It is a good proposal. But we have to examine it closely since we would start production much ahead of them. These evaluations would take some time,” he said. 

As per statutory norms, companies owning different blocks are required to maintain a “safety angle” between the blocks, reducing the amount of coal they can extract. 

A Reliance Power spokesperson confirmed the development and said: “This is the optimum way to mine coal for promoting coal conservation. We look forward to discussing with NTPC on how to co-ordinate mining operations.” 

Reliance Power had sought government’s approval for joint exploration of coal mines attached with Tilaiya ultra mega power project and NTPC’s Kerandari Aand Pakri Barwadih blocks. Tilaiya blocks – Kerandari B and Kerandari C – lie in between NTPC’s Kerandari A and Pakri Barwadih blocks. 

“The proposal has been recommended by PMO and the standing committee on coal. We have written to the power ministry seeking directions to NTPC for the same. The two companies should now be working toward a strategy to extract coal blocked in barriers and batters in their respective coalfields. They will have to get the strategy approved by the government,” a coal ministry official said.

Source: Article Window