IGI Logo

Oil & gas rebound to drive strong recovery

We resume coverage on Oil and Natural Gas Corporation (ONGC) with a BUY rating and target price of Rs214/share (77% upside). Its FY21 recurring EPS was down 20% YoY on plunge in oil and gas prices as covid hit demand. Brent is up 4.3x from Apr’20 lows to US$75/bbl on demand recovery from lows and OPEC+ capping supply to ensure supply deficit. Iran exports may resume, but vaccine rollout driven demand recovery appears well placed to absorb rising supply and keep Brent over US$70/bbl. UK NBP and Asian LNG prices surging to multi-year highs is likely to boost H2FY22-FY23E APM and deepwater gas prices from FY21 lows. We estimate 72-31% YoY rise in FY22-FY23E EPS; higher oil & gas prices in line with futures may mean 11-12% upside to FY22E-FY23E EPS and 3% to FV.

Brent up 4.3x from Apr’20 lows; set to remain above US$70/bbl:

Brent plunged to US$17.3/bbl in Apr’20 as lockdowns hit demand. Demand recovery from Apr’20 lows, announcement of high-efficacy vaccines, their rollout, and OPEC+ capping supply to ensure supply deficit as demand recovery fumbled due to second wave in Europe helped drive 4.3x surge in Brent from Apr’20 lows to US$75/bbl. 2015 nuclear deal may be revived in Q3CY21, but Iran’s exports may resume only in Q4. This means the rise in Iranian supply can be absorbed by further global demand recovery (Q4 demand 5m b/d higher than in Q2) as vaccines are rolled out. FY22EFY23E Brent based on futures is US$71.8-68.2/bbl (US$68.3/bbl in FY22-TD).

Surge in UK NBP gas and Asian LNG prices to boost APM and deepwater gas prices:

Depletion of gas inventories in Asia and Europe (at least 11-year low) due to severe winter, surge in EU carbon prices (improved viability of gas vs coal to generate power) and supply issues at some LNG liquefaction plants has led to surge in European TTF (13-year), UK NBP and Asian LNG (8-year) prices to multiyear highs for this time of the year. Based on UK NBP and JKM LNG futures, we estimate ONGC’s APM gas price at US$3.15-4.9/mmbtu and deepwater gas price at US$7.4-8.7/mmbtu in H2FY22E-FY23E (US$2-4/mmbtu in H1FY22).

FY22E-FY23E EPS up 72-31% YoY after 20% fall in FY21; no subsidy at high oil prices to rerate ONGC:

We estimate FY22E EPS to be up 72% YoY driven by 51% YoY jump in Brent to US$67.5/bbl. ONGC will gain from high oil prices as it will not have to bear any subsidy as auto fuels remain deregulated, GoI has borne the entire LPG-kerosene subsidy of Rs36-374bn in FY17-FY21, and there has been no subsidy on LPG and kerosene in the last 14-16 months. ONGC’s FY19 EPS rise of 40% YoY should have led to rerating as it did not have to bear any subsidy when Brent was at US$70/bbl. However, ONGC was not rerated due to GoI divestment by way of ETFs and low gas prices. Surge in APM and deepwater gas prices to US$4.25-8.4/mmbtu and rise in output from ONGC’s KG basin deepwater block is estimated to drive 31% YoY rise in FY23E EPS. Higher Brent and gas prices in line with futures would mean 11-12% upside to FY22E-FY23E EPS and 3% to FV to Rs221. CMP reflects long-term Brent at just US$49/bbl.

To Read Complete Report & Disclaimer Click Here

For More ICICI Securities Disclaimer https://www.icicisecurities.com/AboutUs.aspx?About=7

Above views are of the author and not of the website kindly read disclaimer