19 March, 2016
Price: Rs. 207.20
Oil & Natural Gas Corporation Limited (“ONGC” or the “Company”) is the second largest oil and gas exploration and production company in the world and ranks 23rd among leading global energy majors. The Company’s primary business includes exploration and production of crude oil, natural gas, LPG and other value-added petroleum products.
ONGC has also set up a subsidiary, Oil Videsh Limited (OVL), for overseas oil exploration and production. OVL is operating in 15 countries with 30 projects with cumulative investment worth over USD 15 billion.
ONGC commands a huge share of ~70% of the domestic crude production. ONGC’s robust infrastructure and strong capabilities in the field of exploration, production, transportation and processing have enabled it to become a leader in the oil and gas space in the country.
Strong Financial Position
ONGC has shown consistent growth over the last ten years (i.e. 2005-06 to 2014-15). It’s operating profit (EBITDA) over this period grew at an impressive CAGR of 10.04 %. Company’s reserves are in excess of Rs. 1,76,177 Cr (FY 2015), and it operates with negligible debt (0.29- debt to equity) on its books. ONGC has consistently been among the top dividend paying companies. The Company has been consistently paying dividends for more than 10 years.
AT THE CURRENT PRICE OF Rs. 189, ONGCs DIVIDEND YIELD IS 5.00%.
Given the strong financial position of ONGC, I expect the company to remain a consistent dividend payer in future. Further, I expect the company to increase its dividend payouts in future as oil prices recover; this will further increase the dividend yield current price.
Over the last 10 years ONGC has maintained an average Dividend Yield of 4.80%. The below table lists price and dividend yield for the past 10 years:
THE COMPANY’S TRAILING 12-MONTH (TTM) EPS STOOD AT RS 18.14 PER SHARE AS PER QUARTER ENDED DECEMBER 2015. AT CURRENT CMP OF 190, THE STOCK IS TRADING AT A PRICE-TO-EARNINGS (P/E) MULTIPLE OF 10.47.
Capacity Expansion and New Oil Discoveries
ONGC has planned an expansion program to be completed by 2030. According to ONGC’s Perspective Plan 2030, the Company aims to unlock more than 450 million tonnes of oil and oil equivalents. The Company is targeting production of more than 130 MT in 2030, of which half will come from assets owned by its overseas subsidiary ONGC Videsh Ltd (OVL).
As of December 2015, the Company has made 14 oil and gas discoveries in domestic fields (operated by ONGC). These new finds will help ONGC to increase its domestic crude oil production.
Rising Energy Consumption
Rising middle class and increasing urbanization in emerging economies like India will continue to drive energy demand of the kind that offer immense opportunities for oil and gas sector companies. According to the Oil Ministry, Government of India estimates, India’s energy demand is expected to more than double by 2035, from less than 700 million tonnes of oil equivalent (MT) today, to around 1,500 MT.
India is world’s fourth largest energy consuming nation, which imports as much as 80 % of its crude oil and 25 % of its natural gas requirements. While ONGC has already registered its presence in emerging growth areas, we believe that improvement in ONGC’s production is crucial for India’s energy security.
Low Under Recoveries Burden
Due to sharp decline in crude prices and the government’s decision to deregulate diesel prices, under recoveries have reduced. This has proved to be very positive for upstream producers like ONGC as it reduces the fuel subsidy burden share of the government.
Total under-recovery in FY 2015 was Rs. 36,300 Cr., 36% less than FY 2014
Falling Profits | Fall in Crude Oil Prices
The upstream company’s profits have fallen due to consistent fall in global crude oil prices. Falling oil prices have reduced ONGC’s net profit by 64% in Q3 FY 2016. The Company’s cost of producing one barrel of crude oil is ~ US $36 and after including taxes and levies, the cost comes to US $51.52 per barrel.
Unless crude oil prices revive soon, financial performance, results of operations and consequently the share price of ONGC will remain under pressure.
Increasing Use of Electric Vehicles
The use of electric vehicles around the world is rising. Given the environmental concerns around the use of petrol/ diesel as fuel for vehicles; it is only fair to expect the use of vehicles using alternate fuels to keep rising. This remains an omnipresent threat for oil and automobile industry around the world.
Regulatory Policy | Fall in Natural Gas Prices
ONGC’s business will be affected by the changing regulatory policies such as production restrictions, changes in prices, taxes and other amounts payable to various governments or their agencies. Any adverse developments will have a negative impact on the overall profitability of the Company.
For example – In October 2015, the government reduced price of natural gas by 18% to $3.82 per unit. This move will further lower their revenues and cash flows, which are already declining from low oil prices. Natural Gas contributes 23 % to the total revenue for ONGC.
Risks Related to Execution of Projects
ONGC’s expansion projects have long execution timelines with interdependencies. To successfully execute a project, the Company has to rely on multiple equipment and services providers and construction contractors across sites spread over a wide geographic area. Ensuring timely delivery of such services and equipment at the right cost, managing materials at remote sites, while simultaneously ensuring that all compliances are met can pose potential challenges.
Any delay in the commissioning of projects is a concern for the Company as it leads to delay in inflow of revenues. At the same time, company has to incur costs on the delayed projects, thus affecting margins and overall profitability which could have a negative impact on the share price.