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Earnings find support in stronger crude   

Result Highlights ‐ In‐line with estimates  

* 1QFY22 Profitability: Operating Profit and PAT stood at Rs 110bn (+130% YoY; +35% QoQ) and Rs 43.3bn (+755% YoY;  ‐36% QoQ). The operating profits improved sequentially, despite a QoQ drop in crude oil and natural gas (NG) production, primarily on account of 13% QoQ improvement in crude oil realization to USD 65.6/bbl. The PAT nevertheless stood sequentially lower, on account of 83% QoQ lower other income.  

* Crude Oil Production: Crude oil production continued to slide and stood 5% YoY lower at 4.8mmt for ONGC ‐SA and 5.39mmt (‐5% YoY) along with JV. The drop in production was primarily on supply disruption from western offshore. The production is likely to get a leg‐up with start of crude oil production from KG ‐98/2 (40000‐50000 bbl/day), even as ageing fields continue to decline.  

* Natural Gas production: Like the trend seen in crude oil production, ONGC’s NG production as well declined by 4.3% YoY during the quarter, clocking in at 58.3mmscmd (vs 62mmsmcd (‐7% YoY) in 4QFY21). The decline in production was attributable to a) supply disruption from western offshore (Heera & Panna Fields), and b) lower offtake from GAIL due to restricted demand in aftermath of Covid ‐ 2nd wave. The outlook for NG production, however, appears better, with 2nd well in KG‐98/2 close to commissioning and 3rd well expected by end of CY21, the production is expected to improve to ~ 3mmscmd (from ~0.6‐0.7mmscmd at present). The KG ‐98/2 is expected to have a peak production of 14‐15mmscmd for 2‐3years.  

* OVL: The crude oil and NG production for OVL at 2.07mmt and 1.06bcm, also stood weaker by 7% YoY and 11% YoY respectively. The revenue at Rs 40bn nevertheless stood +75% YoY on account of higher (108% YoY) crude oil prices.   

* Capex: ONGC incurred a capital expenditure of Rs 280bn in FY21, as against a budgeted amount of Rs 325bn; The estimated amount for FY22 stands between Rs 298bn and Rs 325bn.  

View & Valuation

The 1QFY22 earnings stood in‐line with our estimates. A 13% sequential improvement in crude oil prices helped shore up earnings, even as crude oil production stood lower by 3% QoQ and 5% YoY. The natural gas (NG)    on the other hand, continued to experience weaker realization at ~USD 2/mmbtu and also a 4% YoY & 5% QoQ decline in production, thereby acting as a drag on earnings.

While NG production is likely to improve 2Q‐3QFY21 onwards, with commissioning of additional wells in KG ‐98/2, the crude production would get a leg only after Jun’22. Besides, the natural gas realization is also expected to improve by 50‐60% Oct’21 onwards and then further iimprovement is expected in April’22 In above back drop we maintain our ADD recommendation on ONGC, with  a revised Mar’23 target price  of Rs 145 (from Rs 140/sh), as we roll estimates forward to FY24e.

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