Falling realisations drag revenue down!
Our REDUCE recommendation on ONGC with a price target of INR 78 is premised on (1) muted crude oil and gas realisations and (2) lack of production growth for oil. Despite production cuts from OPEC and non-OPEC countries, we expect oil prices to remain at USD 36/41 per barrel in FY21/22E vs. USD 63/bbl in FY20, given the weak global macros. Lower oil and gas realisations will drag down profitability for ONGC. In 1QFY21, revenue was ~8% below our expectations owing to a lower-than-anticipated crude oil price realisation of USD 28.7/bbl (vs est. USD 31.7/bbl). EBITDA was ~15% above our expectations due to lower-than-anticipated operating expenses and employee costs. However, APAT fell by ~36%, courtesy substantially lowerthan-anticipated other income.
* Standalone financial performance: Revenue for 1QFY21 stood at INR 130bn (-51/-39% YoY/QoQ). Revenue fell mainly on account of a lower crude realisation (-57/-41% YoY/QoQ). EBITDA fell by 61/31% YoY/QoQ to INR 59bn due to the trickle-down effect of lower revenues. APAT came to INR 5bn (vs INR 59/-31bn in 1QFY20/4QFY20). Standalone operational performance: 1Q crude oil realisation was USD 28.7/bbl (USD 66.3/49.0 YoY/QoQ) whereas gas realisation was USD 2.5/mmbtu vs. USD 3.9/3.3 YoY/QoQ. Oil sales volumes were 5.2mmt, -2.6/- 5.2% YoY/QoQ. Gas sales volumes were 4.2bcm, -15.2/-9.2% YoY/QoQ.
* Outlook for FY21/22 (standalone business): We expect crude oil production volumes to remain subdued at 21.4mmt in FY21 and recovery to 22.8mmt in FY22. Natural gas volumes should dip from 19.4bcm in FY20 to 18.9bcm in FY21 and recover to 20.2bcm in FY22. Oil prices should remain muted at USD 36/41 vs. USD 59 in FY20, given weak global macros, despite production cut from OPEC and non-OPEC countries. Gas realisation should slide to USD 2.7/2.9 per mmbtu in FY21/22E (USD 3.9/mmbtu in FY20).
* We value ONGC’s standalone business at INR 54 and its investments at INR 24. The stock is currently trading at 9.7x FY22E EPS.
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