ONGC: Multiple gains from Russian oil deal
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Oil and Natural Gas Corporation's (ONGC) buyout of 15% stake in Vankorneft Oil project in Russia has received a thumbs up from most analysts as there are clear benefits. For one, the deal will enable ONGC Videsh (OVL), ONGC's overseas subsidiary, to source 66,000 barrels of oil from Vankorneft daily or about 3 million tonnes of oil annually, from the word go. Vankorneft is a subsidiary of Russian oil giant Rosneft. Analysts believe output from this project could provide about one-third of OVL's production and say, the deal valuations at an estimated $1.27 billion and $1.35 billion are also inexpensive.
"The deal value of 15% stake is $2.46/barrels of oil equivalent (boe) which is lower than OVL & Oil deal with Videocon's 10% stake at $2.97/boe and CNPC (China National Petroleum Corp)-ENI deal at $2.8/boe in Mozambique", believe analysts at India Nivesh Research.
This buyout will take OVL closer to achieving its medium-term production target. OVL aims to achieve oil and oil equivalent annual production of 20 million tonnes by 2017-18 versus 8.87 million tonnes prevailing. Notably, Vankorneft seems to be in a phase of increasing oil production. As per Rosneft website, the Vankor field produced 1,531 million barrels of oil in 2013, up from 1,297 million in 2012 and 1,063 million in 2011. Overall, the move is in the right direction. While it will boost ONGC's consolidated production, it is also a right time to acquire assets abroad, believe analysts.
The ONGC stock has underperformed the S&P BSE Sensex in recent past on account of falling crude oil prices which impacts OVL's realisations. Unlike ONGC which shares the subsidy burden with government arising due to sale of some fuels at below market price, OVL's does not and hence, its prospects are strongly co-related to oil prices.
In the domestic business though, reduction in subsidy burden as well as higher clarity on subsidy sharing for this fiscal negates impact of falling crude oil prices and should boost net realisation for ONGC. Though net realisation estimates vary with crude oil price forecasts, analysts believe ONGC's net realisations could be around $50-51 a barrel this fiscal if crude oil price stabilises at $55 a barrel versus $45 a barrel in FY15. Additionally, the company has been prudent in using lower crude oil prices to its benefit by steps such as renegotiating service contracts with drillers which can reduce operating expenditure by 30%.
In this backdrop and inexpensive valuations, most analysts thus are positive on ONGC's prospects. The stock trades at 3.5 times enterprise value to barrels of oil equivalent. Average target price of the analysts polled by Bloomberg since August stands at Rs 344 which indicates huge upside potential of 52% from current levels. However, a steep fall in crude oil prices and/or reduction in gas prices are downside risks for ONGC.
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