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ONGC

Robust earnings, improving prospects

ONGC reported a strong 31% YoY improvement in standalone revenue and 43% YoY rise in EBITDA for Q2FY23 of Rs186.1bn (I-Sec estimate of EBITDA: Rs171.5bn). Net earnings of Rs128.3bn, ahead of I-sec estimate of Rs81.1bn (driven by the EBITDA beat and stronger other income), were lower YoY (-30% YoY) due to a tax-related boost of Rs82bn to PAT in Q2FY22. H1FY23 EBITDA of Rs437.8bn was up 78% and PAT at Rs280.3bn was up 23.6% YoY thanks to a stronger pricing environment for both oil and gas. Despite the strong earnings, stock remains subdued due to: i) concerns about production growth, ii) weak results of subsidiaries HPCL and OVL, and iii) windfall tax. We note, however, even at a realisation of US$75/bbl for oil and Rs20-21/scm for gas, standalone and consolidated EPS for FY23E of Rs40.5/sh and Rs43.3/sh, respectively, are well above historical averages. Also, the government’s proactive adjustment of the new tax in line with fall in international crude prices provides comfort on a minimum floor of oil realisations. We believe valuations of 2.7x FY24E consolidated EPS and 2.2x EV/EBITDA remain attractive. Reiterate BUY.

Brent remains strong despite recent reverses: Brent crude prices have moderated to US$95/bbl levels, driven by concerns of a recession due to inflation and the impact of Russia-Ukraine conflict on the global economy. Q2FY23 average realisation of US$72.9/bbl (net of windfall tax of US$22.6/bbl) was up 5% YoY and H1 net average price of US$90.7/bbl was up 34.5% YoY. At our FY23E and FY24E estimates of Brent crude @ US$95/90 per barrel, we see ONGC’s net realisation remaining at ~US$75/bbl – well above historical averages.

Gas price surge to sustain: Average gas price realisation of Rs19.3/scm was up 3.1x YoY and 5% QoQ in Q2FY23. H1FY23 blended gas price of Rs18.9/scm was up 2.8x YoY. While the Kirit Parikh Committee is expected to lower domestic gas prices to some extent, management believes there would be some element of marketing and pricing freedom in the new formula. Given that KG basin gas would qualify for premium pricing and that international prices would likely remain well above historical levels, we see net gas realisations at Rs22/scm and Rs23.2/scm for FY23E and FY24E.

Conservative on production growth estimates: ONGC’s standalone production of oil & gas (including JV share) declined by ~6.7mtoe in the last 4 years. Also, while the start of production from the KG basin asset and new assets is expected to redress this trend over FY23-FY27, we remain conservative in our estimates, factoring-in 3% CAGR in oil and 9% CAGR in gas output (standalone) over FY22-FY24E.

Stock down 7% in past six months; BUY: We cut our FY23E and F24E EPS by 11.0% and 6.0% respectively to factor-in the marginally lower production and weaker subsidiary earnings. Target price however rises 5% to Rs195/sh due to lower net debt and revisions to production growth estimates over FY24E-FY28E. Reiterate BUY.

Key risks: i) Sharp reversal in oil & gas price trends, ii) further delays in start of production from KG basin, and iii) regulatory setbacks

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