company analysis ashutosh kashyap

8/14/2019 COMPANY ANALYSIS ASHUTOSH KASHYAP

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COMPANY ANALYSIS

ONGCFor

CYGNUS

By

Ashutosh Kr Kashyap

(07BS0040)


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CONTENTS

1. REASONS FOR SELECTING COMPANY......................................................................................... 4

2. BACKGROUND................................................................................................................................. 5

2.1 Incorporation.................................................................................................................................. 5

2.2 Key Facts........................................................................................................................................ 5

2.3 Shareholding Pattern (as on 30th June 2008)..................................................................................... 5

2.4 Product portfolio ............................................................................................................................ 6

2.5 Lines of business............................................................................................................................. 6

3. PRODUCTS AND SERVICES............................................................................................................ 6

3.1 LNG Import & Marketing............................................................................................................... 7

3.2 EXCOM......................................................................................................................................... 7

3.3 Strategic / Business Alliances........................................................................................................... 8

4. BUSINESS MODEL ANALYSIS ......................................................................................................... 8

4.1 Value Proposition ........................................................................................................................... 8

4.2 Target customers............................................................................................................................. 8

4.3 Core Capabilities ............................................................................................................................. 8

5. BUSINESS ANALYSIS........................................................................................................................ 9

5.1 Growth Drivers .............................................................................................................................. 9

5.2 Segmental Analysis .......................................................................................................................... 9

5.3 Market Share................................................................................................................................. 11

Crude Oil ....................................................................................................................................... 11

Natural Gas .................................................................................................................................... 11

5.4 Issues and Challenges.................................................................................................................... 12

a. Unstable oil prices ....................................................................................................................... 12b. Regulated environment................................................................................................................ 12

c. Over dependence on India ........................................................................................................... 12

6. OPERATIONAL PERFORMANCE.................................................................................................. 12

6.1 Sales and sales growth. ...................................................................................................................... 12

6.2 Segmental analysis ......................................................................................................................... 13

6.3 PBDIT and OPM.......................................................................................................................... 13

6.5 Cost Structure ............................................................................................................................... 14


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6.6 Operating Metrics ......................................................................................................................... 14

6.7 Financial performance ................................................................................................................... 15

7.0 CONCERNS.................................................................................................................................... 17

8. OUTLOOK....................................................................................................................................... 17


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1. REASONS FOR SELECTING COMPANY

ONGC ranks as the Numero Uno Oil & Gas Exploration & Production (E&P) Company in Asia, as per

Platts 250 Global Energy Companies List for the year 2007.

ONGC has single-handedly scripted Indias hydrocarbon saga. It accounts for 6.42 billion Tones of in-place

hydrocarbon reserves with more than 300 discoveries of oil and gas; in fact, 6 out of the 7 producing basins

have been discovered by ONGC: out of these In-place hydrocarbons in domestic acreages, Ultimate Reserves

are 2.29 Billion Metric tonnes (BMT) of Oil Plus Oil Equivalent Gas (O+OEG).

It produces 762.3 Million Metric tonnes (MMT) of crude and 440.7 Billion Cubic Meters (BCM) of Natural

Gas, from 115 fields.

ONGC accounts for more than 78% of Indian domestic oil & gas production. Through its overseassubsidiary, OVL the company has spread operations across 14 countries. The company created a record of

sorts by turning Mangalore Refinery and Petrochemicals Limited around from being a stretcher case for

referral to BIFR to the BSE Top 30, within a year. ONGC is the only fully integrated petroleum

company in India, operating along the entire hydrocarbon value chain. ONGC is the most important

company to look for in Oil and gas industry.


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2. BACKGROUND

2.1 Incorporation

Oil and Natural Gas Corporation, ONGC, was set up in 1956. ONGC is a leading National Oil Company of

India engaged mainly in exploration, development and production of crude oil, natural gas and some value

added products. ONGC was subsequently converted into a public limited company in Jun.'93 following new

liberalized economic policy adopted by the Government of India in July, 1991 sought to deregulate and de-

license the core sector (including petroleum sector) with partial disinvestment of Govt. Equity in Public

Sector Undertakings and other measures.

The company primarily operates in India and has a presence in 14 foreign countries through its overseas arm,

ONGC Videsh (OVL). It is headquartered in Dehradun, India and employs about 34,722 people.

2.2 Key Facts

Head office Oil & Natural Gas Corporation Limited

Tel Bhavan, Dehradun, Uttaranchal -248 003, INDIA.

BSE ticker 500312

Financial Year end March

2.3 Shareholding Pattern (as on 30th June 2008)

During March, 1999, ONGC, Indian Oil Corporation

(IOC) a downstream giant and Gas Authority of India

Limited (GAIL) the only gas marketing company,

agreed to have cross holding in each other's stock to

pave the way for long-term strategic alliance amongst

themselves, both for the domestic and overseas

business opportunities, in the energy value chain.

President

of

India, 74.

14

IOCL, 7.6

9

GAIL, 2.4 LIC, 2.37

% Shareholding

Source: ongcindia.com


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ONGC has state of the art globally comparable exploration facilities in place.

FACILITIES CAPABILITIES

DRILLLING 97 drilling rigs(79 owned + 18 charter hired)

Onshore - 70 rigs

Offshore - 27 rigs

WORK OVER 76Work over rigs (60 owned + 16 charter hired)

Onshore- 74 rigs

Offshore-2 rigs

WELL SIMULATION 113Well simulation Units

Onshore- 108 units

Offshore- 5 simulation vessels

SESMIC UNITS 25 Sesmic Crew (+ 1 off shore vessel + 3 VSP*)VIRTUAL REALITYCENTERS 5 Mumabi(2), Dehradun(1), Vadodra (1)

Chennai (1)

REGIONAL COMPUTER

CENTERS 5 Mumbai, Vadodra, chenna1, Jorhat, Kolkata

*VSP -Vertical seismic profiling

3.1 LNG Import & Marketing A joint venture company, PETRONET LNG LIMITED is in place with ONGC having 12.5% equity

interest for import and marketing of LNG in India. Other partners in this venture are IOC, GAIL and BPCL

each with 12.5% equity. The remaining 50% equity will be offered to strategic partners, financial institutions

and public. The Company is planning to install two LNG terminals (Dahej in Gujarat and Cochin in Kerala)

on western coast of India with total capacity of 7.5 MMTPA.

3.2 EXCOM

The exploration contract monitoring (EXCOM) group is the exclusive business face of ONGC for jointly

operated oil & gas exploration and production ventures within India. It is the nodal agency of ONGC for

single window E&P business communication with companies and the government. Its functions include:

Evaluation and negotiations of bids pertaining to exploration acreages and development ofdiscovered fields under joint venture.

Negotiations, of production sharing contracts (PCS) and joint operation agreements (JOA) withparties to the contract.

Monitoring and co-ordination.

Source: Investors Presentation


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Providing opportunities to companies for assessment of prospectively of Indian basins andinvestment decisions through its New Delhi office

3.3 Strategic / Business Alliances

Oil and Natural Gas Corporation Ltd. (ONGC) is engaged in E&P activities both in Onshore and Offshore.

The Corporation is entering deepwater exploration and drilling, exploration in frontier basins, marginal field

development, optimization of field development plan field recovery and other allied areas of service sector.

Engagements in these areas will require best-in-class technology, processes and practices and savvy use of the

R & D assets to their fullest advantage.

ONGC is looking towards companies / service providers established in the industry for technology transferand absorption, and technological collaboration and support. The company intends to achieve this objective

through alliances and sustained relationship.

4. BUSINESS MODEL ANALYSIS

4.1 Value Proposition

The company has presence in all aspects of the Oil and Gas value chain. The company has operations in oil

exploration and production both in India and abroad. The companys subsidiary OVL (ONGC videsh Ltd)

has presence across 12 countries through partnerships/ strategic alliances / joint ventures with preferred

partners. The company strives to reach out to opportunities specific related business of downstream sector,

core competence services business, energy and other sectors in general.

4.2 Target customers

ONGC sells its products to a whole host of customer which ranges from small retailers to large industrial

users to different clients at different level of the value chain. The customer from ONGC is varied across

geographies in India as well as in the world. The company has a pipeline network of 20300 Km (both

offshore and onshore). The major customers are corporate like fertilizer companies, power companies and

power companies. ONGC is also venturing into retail outlets under brand name of OVAL. It has license to

open 1100 retail stations across the countries. With this ONGC will have presence across the entire value

chain.

4.3 Core Capabilities

ONGC is practically Zero Debt Corporate. With numerous tie-ups, joint ventures acquisitions and efficient

management ONGC has become one of the largest Oil and Gas company in India. The core capabilities can

be summed up as follows:


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ONGC owns and operates more than 15000(Onshore) kilometers of pipelines in India, includingnearly 3800 kilometers of sub-sea pipelines. No other company in India operates even 50 per cent of

this route length.

Strong intellectual property base, information, knowledge, skills and experience. Maximum number of Exploration Licenses, including competitive NELP rounds. State-of-the-art seismic data acquisition, processing and interpretation facilities Uses one of the Top Ten Virtual Reality Interpretation facilities in the world One of the biggest ERP implementations in the Asia. ONGCs success rate is at par with the global norm and is elevating its operations to the best in class

level, with the modernization of its fleet of drilling rigs and related equipment.

5. BUSINESS ANALYSIS

5.1 Growth Drivers

The growth drivers of the company are as follows:

State-of-the-art seismic data acquisition, processing and interpretation facilities. Professionally managed organization with high operational efficiency. SAP R/3 in place. Strong intellectual property base, information, knowledge, skills and experience. Bagged the most number of contracts (24 out of 52) under NELP. Has presence across the value chain. Got license to open 1100 retail outlets. With large number of Joint ventures the company is leveraging on its capabilities to have a global

presence.

5.2 Segmental Analysis

Contribution to topline: The contribution of crude oil

sales (2006-07) is 51% i.e. Rs 37,152 crores and equal to

24.41 MMT. In the year crude oil sales (2007-08) is 51%

i.e. Rs 38,519 crores and equal to 24.08 MMT.

Similarly the contribution of Gas and others remains the

same in both the years.

51%42%

7%

% contribution 2006-07

Crude Oil (MMT) Natural gas (MTOE) VAP (MMT)


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RRR (Reserve replacement ratio): The ratio of reserve

additions to production. Reserve replacement is calculated

by summing the total reserves added over a five-year

period. The ratio is calculated by dividing replacement by

production over the same period.

The RRR of the company is up and above 1 for the past 4

years. This shows that the company is adding on reserves

in subsequent years. Infact, the RRR of ONGC when

compared to the companies all over the world is better

than most of the companies.

50%43%

7%

% Contribution to sales 2007-08

Crude Oil (MMT) Natural gas (MTOE) VAP (MMT)

Source: Investors presentation June 08

0

0.2

0.4

0.6

0.8

1

1.2

1.41.6

2003-04 2004-05 2005-06 2006-07 2007-08

RRRRRR>= 1 Successive 4 yrs

Source: Investors presentation June 08


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5.3 Market Share

Crude Oil

ONGC leads in the production of crude oil. Onshore it

occupies around 73% of the market with its nearest

competitor being OIL. Offshore ONGC is the leader by

far. The above two graphs show the same.

ONGC accounts for nearly 78% of the total crude oil

production in India. The graph sows the same over theyears.

Natural Gas

ONGC is also the leader in the Natural gas segment

with more than 70% market share across the years.

The other major player is Oil India Ltd.

17677 1816516309

17993

0

4006 4240 4227

0

5000

10000

15000

20000

2003-04 2004-05 2005-06 2006-07

Chart Crude oil production break-up

(000 tonnes) offshore

OIL others

3002 3196 3234 3107

8380 83208095 8058

74 74 101 1610

1000

2000

3000

4000

5000

6000

7000

8000

9000

2003-04 2004-05 2005-06 2006-07

Crude oil production break-up (000

tonnes) onshore

OIL ONGC others

78 78

7677

74

75

76

77

78

79

2003-04 2004-05 2005-06 2006-07

Crude oil production Share of

ONGC in %

Source: Petroleum.nic.in

Source: Petroleum.nic.in Source: Petroleum.nic.in

23584 22971 22574 22442

31962 31763 32202 3174773.8

72.3

70.170.7

68.0

69.0

70.0

71.0

72.0

73.0

74.0

75.0

0

5000

10000

15000

20000

25000

30000

35000

2003-04 2004-05 2005-06 2006-07

Market share of ONGC in natural gas

ONGC(LHS) TOTAL(LHS) %(RHS)

Source: Petroleum.nic.in


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5.4 Issues and Challenges

a. Unstable oil prices

Oil is one of the companys core operations. ONGC being a state owned company of India has been

responsible to serve oil needs of the nation. The oil prices have almost doubled in last two years. At highs the

company loses the opportunity to exploited potential margins. ONGC derives most of its revenues from the

sale of oil. Expected fluctuation in oil prices will impact the companys top line growth.

b. Regulated environment

The company operates in highly regulated environment. The crude oil as well as gas pricing is controlled by

the government both formally and informally. The company is also required to provide subsidies to public

sector oil marketing companies both directly and indirectly. The highly regulated environment will adversely

affect the revenues and profits of the company.

c. Over dependence on India

ONGC derived about 88.8% of its consolidated revenues in fiscal 2007 from India. Over dependence on

India would restrict the companys income growth to the local economy. It is also exposed to the risk of

economic slowdown and government regulations in India.

6. OPERATIONAL PERFORMANCE

6.1 Sales and sales growth.

The sales have increased over the years at a CAGR of

16.60%. The increase in the sales can be attributed to

the following factors.

Crude oil prices have increased. So the salesin terms of Rs have increased.

Indias crude Consumption has increased at aCAGR of 5.9 % in the corresponding period.

Out of the total sales crude oil contributes around 51% and gas contributes 42%, rest are value added

products.

32.51

46.71 48.201

56.90460.137

0

10

20

30

40

50

60

70

2003-04 2004-05 2005-06 2006-07 2007-08

Rs

in

Cr

Turnover/Gross sales


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6.2 Segmental analysis

The production figures of crude oil and natural gas is

shown in the bar graph. The contribution almostremains constant over the years. This trend also

translates into sales where the contribution almost

remains the same over the years. the pie chart below

shows a more clear breakup of the sales.

6.3 PBDIT and OPM

The companys earnings have come down. This is because of following reasons

Higher oil subsidies Increase in the exploration costs.

Crude Oil

51%

Natural

Gas

43%

C2-C3

1%

LPG

2%

Naptha/A

RN

3%

SKO

0%Other

3%

Product-wise breakup

0.00

50,000.00

100,000.00

150,000.00

200,000.00

250,000.00

300,000.00

350,000.00

400,000.00

mar' 08 mar '07 ma r'06 ma r' 05

PBDIT(Rs Mn)

0.50 0.50

0.57

0.52

0.46

0.48

0.50

0.52

0.54

0.56

0.58

mar'08 m ar'07 m ar '06 m ar '05

OPM(Rs mn)

26.06 26.48 24.4 26.05 25.95

23.58 22.9722.57 22.44 22.33

0

10

20

30

40

50

60

2003-04 2004-05 2005-06 2006-07 2007-08

Sales contribution

OIL(MMT) GAS(MMTOE)


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Increase in shipping and transportation cost.The company has a good operating profit margin considering the fact that it is a investment intensive industry

where the project gestation period is high. The company has a consistent OPM of more than 50% over the

last 4 years. it signifies that the company earns Rs 0.50 from each rupee invested after meeting all its expenses.

The ratio is healthy if we take into fact that ONGC is practically a zero debt company. The OPM value can

be attributed to the efficient management in place. ONGC has state of art technologies which has increased

the OPM.

6.5 Cost Structure

The chart above shows the cost structure of the company. the highest expenditure is on raw material

followed by tax and depreciation. The taxes include current tax, deferred tax, and fringe benefit tax.

6.6 Operating Metrics

1.2 0.52.0 2.2

0.0

10.0

20.0

30.0

40.0

50.0

60.0

mar'08 mar'07 mar'06 mar'05

Cost as % of net sales

Expendit

ureInterest

Deprecia

tionTax

Consumpti

on of Raw

Materials,

42.07

Other

Expenditur

e, 18.35

Depreciatio

n, 23.31

Statutory

Levies, 31.7

0

Employees

Cost, 2.22

% Cost of net sales (Exp Break up)

136.4 142.9128.1

104.8

137.3 137

169.5

66.7 66.5

40.733.7

49.4 51.565.6

0

50

100

150

200

Fy01 Fy02 Fy03 Fy04 Fy05 Fy06 Fy07

Reserve Accretion

IIP(MMToE) Ultimate(MMToE)

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

2003-04 2004-05 2005-06 2006-07 2007-08

RRR

RRR>= 1 Successive 4 yrs

Source: Investors presentation


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The Graph shows the accretion ratios. Accretion ratio of the company is quite healthy compared to other

companies of the world. The value of reserve accretion ratio greater than one signifies that the company is

adding reserves every year. For ONGC it is currently at 1.35.

6.7 Financial performance

Turnover is increasing at a CAGR of 16.6% and net profit is increasing 17.8%. the increase in profit is despite

the loss the company is making due to high subsidies. This highlights the internal operational efficiency of the

organization.

The Net worth of the company has increased at a CAGR of 15%. This can be attributed to the higher capital

expenditure which has increased at a CAGR of 24% within the same period.

8.664

12.98314.431

15.64316.702

0

2

4

6

8

10

12

14

16

18

2003-042004-052005-062006-072007-08

Net profit (Rs 000' Crs)

40.02446.314

53.593

61.41

69.944

0

10

20

30

40

50

60

70

80

2003-04 2004-05 2005-06 2006-07 2007-08

Net worth (000' Crs)

6.852

10.68111.421

13.305

16.216

0

5

10

15

20

2003-04 2004-05 2005-06 2006-07 2007-08

CAPEX With Breakup

(Rs 000' Crs)

Domestic E& P integration

Source: Investors presentation

32.51

46.71 48.201

56.90460.137

0

10

20

30

40

50

60

70

2003-04 2004-05 2005-06 2006-07 2007-08

Turnover(Rs000 Cr)


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The Company has a health ROCE, considering that oil exploration and production takes requires a lot ofcapital expenditure, which shows that the returns from the assets are good. Although the values are better

than the industry averages.

ONGC is almost a zero debt company. This is

reflected in the D/E ratio across the years. The

earnings have increased at a CAGR of 17.8% which

can be mainly attributed to the operational efficiency

of the company. The company has retained ore than

or equal to 50% of the earnings. This indicates the

growth potential of the company.

0

10

20

30

40

50

60

70

2003-04 2004-05 2005-06 2006-07 2007-08

ROCE

0

0.5

1

1.5

2

2.5

3

3.5

2003-04 2004-05 2005-06 2006-07 2007-08

current ratio

0

0.002

0.004

0.006

0.008

0.01

0.012

2 00 3- 04 2 00 4- 05 2 00 5- 06 2 00 6- 07 2 00 7- 08

D/E

0

20

40

60

80

100

120

140

20 03 -0 4 20 04 -0 5 20 05 -06 20 06 -07 20 07 -08

EPS

4.804

6.5037.114

8 8.694

46.00

47.00

48.00

49.00

50.00

51.00

52.00

53.00

54.00

55.00

56.00

0

1

2

3

4

5

6

7

8

9

10

2003-04 2004-05 2005-06 2006-07 2007-08

%

Of

RE

Retained

Earnings(000'Cr)


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7.0 CONCERNS

Increasing exploration and drilling cost due to scarcity of the resources and nature of oil reserves. Increasing crude oil prices Regulation and corresponding increase in subsidies (Rs 22001cr for FY ending 08).

8. OUTLOOK

Outlay of Rs. 1,296.34 Billion against Rs. 760.66 Billion during X Plan ONGC looking for New Energy Sources like wind energy Collaborations with global players to leverage their technology and reach for companys expansion.

company analysis ashutosh kashyap

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