Published on 4/07/2020 1:46:02 PM | Source: Emkay Global Financial Services Ltd

Buy ONGC Ltd For Target Rs.105 - Emkay Global

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Q4 turns red on impairment; outlook hinges on oil prices and gas reforms

* ONGC reported standalone revenue/EBITDA/net loss of Rs214.6bn/Rs55.5bn/Rs31.0bn in Q4FY20, owing to Rs49bn of impairment. EBITDA missed estimate by 15% due to higher opex (incl. Rs11.1bn of forex loss) and dry wells write-off (up 78% qoq).

* Revenue beat estimates by 2% on better crude realization discount to Brent qoq at USD1.6/bbl and higher JV crude and gas volumes. Depletion fell over 20%, though offset by Rs15.7bn impairment in DD&A. Other income was down 45% yoy on lower dividends.

* Nominated block crude output rose 2% qoq/yoy at 5.2mmt, with oil sales/production improving from 88% to 90% qoq. Gas production fell 7% yoy to 5.8bcm (flat qoq). JV numbers were down qoq on weak Cairn RJ output and PMT transfer. VAP was flat qoq.

* We cut FY21/22E EBITDA by 6% each due to lower oil prices and output, but PAT is unchanged as we build in 25.2% tax. We value ONGC at 4x FY22E core EV/EBITDA (vs. 3x earlier) and raise TP slightly by 4% to Rs105. Maintain Buy but with EW stance in EAP.

Result highlights: The older tax regime was continued in Q4, but can be changed till return filing. APAT was Rs8.0bn. For FY20, ONGC’s revenues/EBITDA/APAT fell by 12%/21%/39% to Rs962bn/406bn/167bn due to a 3-4% fall in volumes and 14% drop in oil realization. DD&A rose, while Other Income fell. IndAS 116 PBT impact was negative Rs7.2bn. Net debt fell 38% yoy to Rs129.8bn but up HoH. Domestic 2P reserve accretion was 55mmtoe with RRR of 1+ and 12 discoveries. No final dividend was declared. Payout was 47%. Capex was Rs300bn. OVL reported EBITDA/APAT of Rs116.3/35.8bn in FY20, up 1%/10% with 1% output growth. Impairment was Rs31.3bn. Covid-19’s impact was 9% on gas demand during lockdowns but now fully restored. Some projects may have been delayed. No material impact.

Management guidance: Impairment was based on USD45 Brent/USD2.39 gas price for FY21, with 5% escalation/flat for 3/4 years and flat/one USD1 per mmbtu rise thereafter. VAP pricing was also oil linked. HP-HT gas is priced at a USD1/mmbtu discount to deepwater ceiling and KG 98/2 at 3M trailing western India DES LNG. Breakup was Rs15.6/13.0/5.2/9.5/4.2bn on Assam/Rajahmundry/VA/WO- B series /KG OSN 2001-3. Reversal can happen with higher oil/gas prices. NB/total output target for FY21 is 21.1/23.9mmt crude and 25.5/26.2bcm gas, though gas may be lower due to Q1 Covid-19 impact. Volumes will come from 98/2, WO-16, Ratna and in 2-3 years gas should reach 27-28bcm. Expect 98/2 to touch 2.5-3mmscmd by Q4FY21. Oil would start from CY21. Peak oil/gas is 14-15mmscmd/50kbpd. Cash opex should be range-bound. Capex in FY20 is likely at Rs300bn vs. Rs320bn target. ONGC is seeking duty relief, minimum support price, free gas pricing and gas under GST, with hopes on the latter. MAT credit is there. Valuation: We value listed investments at a 50% holdco discount to CMP. Key risks are adverse oil-gas prices, policy issues, divestment, cost overruns, Covid-19-led delays and exploration failures. Key triggers are duty relief and gas pricing reforms.


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