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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.