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Further delay in KG-DWN-98/2; expect an upsurge in APM price

* ONGC reported in line crude oil sales (-4% YoY), while gas sales continue to be lower than our estimate (-6% YoY). Lower opex led to beat on EBITDA (8% higher than our estimate at INR101b).

* ONGC almost reached FY20 production levels for crude oil, while the decline in gas production is due to lesser offtake by customers due to the COVID-19 outbreak. This resulted in a production shortfall in VAP as well.

* Oil/gas production in FY21 was 22.5mmt/22.8bcm, totaling 45.3mmtoe. The company expects FY22 production at 48.7mmtoe, with oil/gas production at 22.5mmt/26.2bcm. Total production is expected to touch ~49mmtoe/52mmtoe by FY23/FY24.

* We build our oil production estimates in line with management’s guidance (at 22.6/24mmt for FY22/FY23), although our gas production estimate is conservative, given the continued delay in KG basin gas production.

* ONGC expects a further delay in production from the KG basin, with oil production guidance at 1.8mmt/2.2mmt in FY22/FY23 and gas production guidance at 2bcm/3bcm/4bcm in FY22/FY23/FY24 (v/s 1.2bcm in FY21).

* Our gas production assumption remains unchanged ~25bcm/28bcm for FY22/FY23. ONGC stated that APM prices have bottomed out and would probably increase by 50-60% in the next revision (i.e. starting Oct’21) on its current base of USD1.79/mmbtu. Further expect an upward revision in APM prices in Mar’22 as well.

* Brent prices have spiked to USD75/bbl on the back of strong global demand. We believe supply would soon catch up with the spurt in demand, with OPEC+ planning a further easing of production cuts from Aug’21 (article).

* We look forward to the next OPEC+ meeting scheduled on 1st Jul’21 and forecast Brent prices at USD64/60/bbl in FY22/23E, considering the easing of current (5.8mnbopd) production cuts over the next couple of quarters.

* Despite the continued delay, ONGC’s gas production is likely to clock 10% CAGR over FY21-23E, with efforts to arrest the decline in oil production.

Beat on EBITDA led by lower opex

* Net crude oil sales stood in line with our estimate at 5.2mmt (-4% YoY). While gas sales were 6% lower than our estimate at 4.4bcm (-6% YoY), VAP sales stood at 726tmt (12% lower than our estimate, -16% YoY).

* Net oil realization was lower than our estimate (USD61) at USD58.1/bbl. Revenue was 4% below our estimate at INR212b (flat YoY).

* EBITDA was 8% higher than our estimate at INR101b on lower opex. Opex was lower led by a decrease in spot LNG prices, contractual payment, and lower power and fuel expenditure, although an increase in repairs and maintenance cost partly offset the benefit of a reduction in opex. Higher other income led to PBT at INR63b (71% higher than our estimate).

* ONGC recognized an exceptional item of INR26b as impairment reversal. Reported PAT stood at INR67b. Adjusted PAT stood at INR48b (v/s INR7b in 4QFY20). The company is yet to move to the new tax regime.

FY21 impacted by lower commodity prices

* Revenue fell 29% YoY to INR681b in FY21 owing to a decline in net oil price realization by 27% to USD42.8/bbl. Crude/gas sales fell 3%/9% YoY to 20.7mmt/17.7bcm. VAP sales declined by 15% YoY to 3,026tmt.

* EBITDA was 33% lower YoY at INR328b, with PBT at INR164b (-20%) owing to lower (33% YoY) interest cost – on the back of a decrease in short-term loans and commercial borrowings and higher (8% YoY) other income. ONGC took an impairment reversal of INR14b in FY21 v/s an impairment charge of INR49b in FY20. Reported PAT stood at INR112.5b in FY21 (-16% YoY), while adjusted PAT stood at INR103b (-38% YoY).

Valuation and view – maintain Buy

* Capex guidance for FY22 stands at INR295b (v/s INR280b spent in FY21).

* The company announced a final dividend of INR1.85/share (in addition to an interim dividend of INR1.75), totaling INR3.6/share.

* ONGC has declared total 10 discoveries (three on land and seven offshore) in FY21. Of these, six are prospects (one on land and five offshore) and four are pools (two on land and two offshore).

* For ONGC, cash flow breakeven stands at USD50-55/bbl for oil and USD3- 3.5/mmbtu for gas. As the variable cost of production is low, domestic gas (APM) price ceiling won’t affect production from KG basin.

* OPAL’s capacity utilization stood ~100%/90% in 4Q/FY21. Its performance is steady, and it turned tax positive in 4QFY21. ONGC is further improving process efficiencies to keep its profit positive.

* ONGC is trading at 2.5x FY23E EV/EBITDA and 4.4x FY23E P/E. We value the company at 10x FY23E adjusted EPS of INR11.7 and add value of investments to arrive at our TP of INR150. We reiterate our Buy rating.

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