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Healthy crude realization despite SAED

Our view

ONGC’s 2QFY23 standalone operating profit at Rs 160.9bn (+28% YoY; -35% QoQ), stood in-line with our estimates. Ebitda though higher YoY on higher crude oil realization, stood lower QoQ due to sequentially lower gross and net crude oil realization (adjusted for SAED impact of Rs 64.5bn). The consolidated Ebitda at Rs 138.04bn, however stood lower by 22% YoY & 27% QoQ, weighed down by operating losses at HPCL and MRPL. The crude oil (-2% YoY; -2% QoQ) and natural gas production (-2% QoQ; -1% YoY) continued to be weak in 2QFY23. However, prognosis appears better as the KG-98/2 is expected to start production from May’23. The peak production of 45000bpd of crude oil and 12mmscmd of natural gas from KG-98/2, is expected by FY25. A rally in global crude oil and natural gas prices is key driving factor behind ONGC’s profitability and any moderation thereof would have a concomitant impact on its operating cashflows even as capex requirement continues to remain high, in order to maintain production from aging fields. ADD.

Result Highlights

? Profitability: Operating Profit and Adj. PAT stood at Rs 160.9bn (+28% YoY; -35% QoQ) and Rs 128.3bn (-30% YoY; 16% QoQ). Sequential lower crude prices coupled with SAED led to QoQ lower operating profits. QoQ higher other income and lower depreciation helped blunt the impact of sequential decline in Ebitda on PAT. The YoY decline in PAT despite YoY higher EBITDA however is on account of deferred tax reversals in the base quarter. The depreciation and impairment stood lower QoQ on transfer of DSF fields to successful bidder and consequent reversal of accumulated impairment. While the survey and drywell expense stood higher by 289% YoY and 127% QoQ; the operating expense stood higher by 23% YoY but 4% lower QoQ.

? Crude Oil Production: Crude oil production continued to slide and stood 2% YoY & 2% QoQ lower at 5.36mmt (-2% YoY; -2% QoQ) along with JV. ONGC-SA production stood at 4.86mmt (-1% YoY; -2% QoQ).

? Natural Gas production: ONGC’s NG production (along with JV) as well declined by 2% YoY & 1% QoQ to 58.2mmscmd.

? Realization: The crude oil realization during the quarter stood QoQ lower at USD 95.5/bbl (1Q: USD 108.5/bbl); The natural gas realization on the other hand stood QoQ flat at USD 6.1/mmbtu. The impact of SAED (included in excise levy) stood at ~ USD 20/bbl.

? OVL: The Revenue, Ebitda and Adj PAT, during the quarter stood at Rs 31.5bn (- 28% YoY; -16% QoQ), Rs 5.5bn (-80% YoY; -74% QoQ) and Rs (4.57)bn.

? Dividends: ONGC announced an interim dividend of Rs 6.75/sh (30% payout w.r.t. 1HFY23 PAT); the annual payout for FY23 can stand in excess of 40% depending on profitability and capex requirements in the 2HFY23.

Valuation

We recommend an ADD rating on ONGC, with a Mar’24 TP of Rs 160/sh, as we roll estimated forward. Our TP of Rs 160/sh comprises of a) Rs 128/sh for the stand-alone domestic business, valued on DCF basis (Terminal value : Rs 0; WACC: 13%) , b) Rs 9.9/sh for OVL on EV/EBITDA of 4x FY24e and c) Rs 24/sh for investment in listed equities, valued at 30% hold-co discount to 3M average market price.

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