COMPANY ANALYSIS

ONGC
For
CYGNUS
By
Ashutosh Kr Kashyap
(07BS0040)
 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 ....................................................................................................................... 12
b. 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
 6.6 Operating Metrics ......................................................................................................................... 14
6.7 Financial performance ................................................................................................................... 15
7.0 CONCERNS.................................................................................................................................... 17
8. OUTLOOK ....................................................................................................................................... 17
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 India’s 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 overseas
subsidiary, 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.
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) % Shareholding

During March, 1999, ONGC, Indian Oil Corporation
GAIL, 2.4 LIC, 2.37
(IOC) a downstream giant and Gas Authority of India
Limited (GAIL) the only gas marketing company, IOCL, 7.6
9
agreed to have cross holding in each other's stock to
pave the way for long-term strategic alliance amongst
President
themselves, both for the domestic and overseas of
business opportunities, in the energy value chain. India, 74.
14

Source: ongcindia.com
2.4 Product portfolio
Oil and Natural Gas Corporation (ONGC) is engaged in the exploration, production, refining, transporting
and marketing of crude oil, natural gas, liquefied petroleum gas, natural gas liquid, ethane, propane and other
products.

The company’s key products and services include the following:

Products:

Crude oil

Natural gas

Liquefied petroleum gas

Natural gas liquid

Ethane / propane

2.5 Lines of business

ONGC has in-house capability in all aspects of oil and gas business. These are

API (Acquisition, processing & interpretation of seismic data), Drilling, Work over & Well Testing &
Stimulation, Production, Processing, Reservoir Management Applied R&D, Engineering & Construction,
Transportation, Refining, Training, etc.

ONGC is into exploration, production, refining, transporting and marketing of crude oil, natural gas,
liquefied petroleum gas, natural gas liquid, ethane, propane and other products.

ONGC is only the first ever Indian company to figure in fortune’s list of “world’s most admired companies
2007”. It is number 1 E & P company in Asia, number 3 among world E & P companies and number 23
among global energy companies.

3. PRODUCTS AND SERVICES

ONGC has in-house capability in all aspects of the Oil & Gas business across the value chain . ONGC is into
API*, Drilling, Work over & Well Testing & Stimulation, Production, Processing, Reservoir Management,
Applied R&D, Engineering & Construction, Transportation, Refining, Training etc.
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 76 Work over rigs (60 owned + 16 charter hired)
Onshore- 74 rigs
Offshore-2 rigs
WELL SIMULATION 113 Well simulation Units
Onshore- 108 units
Offshore- 5 simulation vessels
SESMIC UNITS 25 Sesmic Crew (+ 1 off shore vessel + 3 VSP*)
VIRTUAL REALITY
CENTERS 5 Mumabi(2), Dehradun(1), Vadodra (1)
Chennai (1)
REGIONAL COMPUTER
CENTERS 5 Mumbai, Vadodra, chenna1, Jorhat, Kolkata
*VSP -Vertical seismic profiling
Source: Investor’s Presentation

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 of

discovered fields under joint venture.

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

Monitoring and co-ordination.

Providing opportunities to companies for assessment of prospectively of Indian basins and
investment 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 transfer
and 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 company’s 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:

ONGC owns and operates more than 15000(Onshore) kilometers of pipelines in India, including
nearly 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.

ONGC’s 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 2006-07
Contribution to topline: The contribution of crude oil
sales (2006-07) is 51% i.e. Rs 37,152 crores and equal to 7%

24.41 MMT. In the year crude oil sales (2007-08) is 51% 42% 51%

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

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

Similarly the contribution of Gas and others remains the
same in both the years.
 % Contribution to sales 2007-08

7%

43% 50%

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

Source: Investors presentation June 08

RRR (Reserve replacement ratio): The ratio of reserve

RRR
additions to production. Reserve replacement is calculated RRR>= 1 Successive 4 yrs
1.6
by summing the total reserves added over a five-year 1.4
period. The ratio is calculated by dividing replacement by 1.2
1
production over the same period. 0.8
0.6
The RRR of the company is up and above 1 for the past 4 0.4
years. This shows that the company is adding on reserves 0.2
0
in subsequent years. Infact, the RRR of ONGC when
2003-04 2004-05 2005-06 2006-07 2007-08
compared to the companies all over the world is better
than most of the companies. Source: Investors presentation June 08
5.3 Market Share

Crude Oil
Chart Crude oil production break-up Crude oil production break-up (000
(000 tonnes) offshore tonnes) onshore
9000 8380 8320
8000 8095 8058
20000 17677 18165 17993
16309 7000
6000
15000
5000
10000 4000 3002 3196 3234 3107
4006 4240 4227 3000
5000 2000
0 1000 74 74 101 161
0
0
2003-04 2004-05 2005-06 2006-07
2003-04 2004-05 2005-06 2006-07
OIL others OIL ONGC others

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

ONGC leads in the production of crude oil. Onshore it

Crude oil production Share of
occupies around 73% of the market with its nearest 79 ONGC in %
competitor being OIL. Offshore ONGC is the leader by 78
far. The above two graphs show the same. 77

ONGC accounts for nearly 78% of the total crude oil 76 78 78

75
77
production in India. The graph sows the same over the 76
74
years.
2003-04 2004-05 2005-06 2006-07

Source: Petroleum.nic.in

Natural Gas Market share of ONGC in natural gas

ONGC is also the leader in the Natural gas segment 32202
35000 31962 31763 31747 75.0
73.8
with more than 70% market share across the years. 30000 74.0
The other major player is Oil India Ltd. 25000 72.3 73.0
20000 72.0
70.7
15000 70.1 71.0
23584 22971 22574 22442
10000 70.0
5000 69.0
0 68.0
2003-04 2004-05 2005-06 2006-07
ONGC(LHS) TOTAL(LHS) %(RHS)

Source: Petroleum.nic.in
5.4 Issues and Challenges

a. Unstable oil prices

Oil is one of the company’s 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 company’s 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 company’s income growth to the local economy. It is also exposed to the risk of
economic slowdown and government regulations in India.

6. OPERATIONAL PERFORMANCE
70
Turnover/Gross sales 60.137
60 56.904
6.1 Sales and sales growth.
46.71 48.201
The sales have increased over the years at a CAGR of 50
Rs 40 32.51
16.60%. The increase in the sales can be attributed to
in
30
the following factors. Cr
20

Crude oil prices have increased. So the sales 10
in terms of Rs have increased. 0

India’s crude Consumption has increased at a 2003-04 2004-05 2005-06 2006-07 2007-08

CAGR 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.
6.2 Segmental analysis 60 Sales contribution
The production figures of crude oil and natural gas is 50
shown in the bar graph. The contribution almost 40
23.58 22.97 22.44 22.33
22.57
remains constant over the years. This trend also 30

translates into sales where the contribution almost 20

26.06 26.48 24.4 26.05 25.95
remains the same over the years. the pie chart below 10

shows a more clear breakup of the sales. 0

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

OIL(MMT) GAS(MMTOE)

Product-wise breakup
C2-C3
1%
Natural
Gas
43%
LPG Naptha/A
2% RN
3%

Crude Oil
51% SKO
Other
0%
3%

6.3 PBDIT and OPM

PBDIT(Rs Mn) OPM(Rs mn)

400,000.00
0.58 0.57
350,000.00

300,000.00 0.56
250,000.00 0.54 0.52
200,000.00 0.52 0.50 0.50
150,000.00 0.50
100,000.00
0.48
50,000.00
0.46
0.00
mar'08 mar'07 mar'06 mar'05
mar'08 mar'07 mar'06 mar'05

The company’s earnings have come down. This is because of following reasons

Higher oil subsidies

Increase in the exploration costs.

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

Cost as % of net sales

60.0
% Cost of net sales (Exp Break up)

50.0
Employees
Cost, 2.22
40.0 Expendit
ure
Interest Statutory Consumpti
30.0
Levies, 31.7 on of Raw
Deprecia 0 Materials,
20.0 42.07
tion
Tax
10.0
2.0 2.2 Depreciatio
1.2 0.5 n, 23.31
0.0 Other
Expenditur
mar'08 mar'07 mar'06 mar'05
e, 18.35

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

Source: Investor’s presentation

200
Reserve Accretion 169.5 RRR
RRR>= 1 Successive 4 yrs
142.9
150 136.4 137.3 137 1.6
128.1
1.4
104.8
1.2
100 1
66.7 66.5 65.6
49.4 51.5 0.8
40.7 33.7
50 0.6
0.4
0.2
0
0
Fy01 Fy02 Fy03 Fy04 Fy05 Fy06 Fy07 2003-04 2004-05 2005-06 2006-07 2007-08
IIP(MMToE) Ultimate(MMToE)
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

Source: Investor’s presentation

70
Turnover(Rs000 Cr) 60.137
18 Net profit (Rs 000' Crs) 15.643 16.702
60 56.904 16 14.431
12.983
50 46.71 48.201 14
12
40 10 8.664
32.51
30 8
6
20
4
10 2
0 0
2003-04 2004-05 2005-06 2006-07 2007-08 2003-04 2004-05 2005-06 2006-07 2007-08

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.

Net worth (000' Crs) 20 CAPEX With Breakup

(Rs 000' Crs) 16.216
80 69.944
70 15 13.305
61.41
60 53.593 10.681 11.421
50 46.314
40.024 10
40 6.852
30
5
20
10
0 0
2003-04 2004-05 2005-06 2006-07 2007-08
2003-04 2004-05 2005-06 2006-07 2007-08
Domestic E& P integration

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.
 ROCE current ratio
3.5
70
3
60
2.5
50
2
40
1.5
30
1
20
0.5
10
0
0
2003-04 2004-05 2005-06 2006-07 2007-08
2003-04 2004-05 2005-06 2006-07 2007-08

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

D/E EPS
0.012 140
0.01 120
0.008 100
80
0.006
60
0.004 40
0.002 20
0 0
2003-04 2004-05 2005-06 2006-07 2007-08 2003-04 2004-05 2005-06 2006-07 2007-08

ONGC is almost a zero debt company. This is 10 Retained 56.00

Earnings(0
8.694
reflected in the D/E ratio across the years. The 9 8 55.00
8 00'Cr) 54.00
7.114
earnings have increased at a CAGR of 17.8% which 7 6.503 53.00
can be mainly attributed to the operational efficiency 6
4.804
52.00 %
5 51.00 Of
of the company. The company has retained ore than
4 50.00 RE
or equal to 50% of the earnings. This indicates the 3 49.00

growth potential of the company. 2 48.00

1 47.00
0 46.00
2003-04 2004-05 2005-06 2006-07 2007-08
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 company’s expansion.