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Higher DD&A and taxes dent bottom-line; on consolidation mode in gas businesses

* Q3FY21 standalone revenue/EBITDA/PAT stood at Rs170.2bn/65.1bn/13.8bn. EBITDA was 3% above estimate, due to lower opex which had Rs4.3bn of forex gain. RPAT was a 42% miss on higher DD&A, interest and ETR of 51% (Vivad Se Viswas settlement).

* Nominated block (NB) crude output was down 2% yoy/1% qoq to 5.06mmt (1% below est.), while gas fell 5%/1% to 5.57bcm (2% below). VAP declined 10% yoy/2% qoq to 0.81mmt. Overall volumes (down 5% yoy/1% qoq at 12.3mmtoe) missed estimate by 1%.

* Revenue was a 1% beat on higher-than-expected JV sales to production. NB net crude realization came in at USD43.2/bbl - a USD1.4/bbl discount to Brent vs. USD1.3/bbl in Q2. NB gas realization fell 24% qoq to Rs5.4/scm due to the APM price cut in Oct’20.

* We raise FY21/22/23E EPS by 18/36/38%, assuming higher oil prices, a weaker rupee and lower opex. We roll over to Mar’23E, and increase TP by 30% to Rs130, valuing the core business at 4x EV/EBITDA vs. 3.5x earlier. Maintain Buy/OW stance in EAP

Highlights: Survey cost of Rs3.6bn was higher than estimates, while dry-wells write-off of Rs14.8bn was largely in line. DD&A rose 20% qoq to Rs44.3bn on Rs3.2bn of impairment and increase in depreciation, while interest costs jumped 51% qoq to Rs4.8bn. Other income fell 13% yoy/45% qoq to Rs12.2bn but was largely in line. ONGC continued with the older tax regime. The board declared Rs1.75/sh of interim dividend. 9MFY21 capex as per PPAC was Rs176.1bn. OVL reported flat revenue qoq at Rs32.4bn in Q3, while EBITDA fell 23% to Rs18.4bn on opex increase. DD&A rose 12% qoq, while RPAT was down 21% qoq/46% yoy to Rs5.3bn, with Rs0.4/sh EPS contribution to ONGC. OVL’s 9M capex (PPAC) was Rs41.6bn. The board approved the creation of a 100% subsidiary on allied gas activities and biofuels. ONGC will also acquire a 5% stake in IGX. Eight discoveries were notified in 9M.

Guidance: Current KG 98/2 gas output is 0.32mmscmd but ONGC expects it to hit 2.5- 3.5mmscmd by May and average at 3.4/8.5 in FY22/23E. Peak should be seen by FY24. Overall crude/gas output guidance is 22.3mmt/22.9bcm in FY21E and 23.0/25.0 in FY22E. Management believes it is only a matter of time before the APM gas pricing anomaly is set right. FY21/22 standalone capex guidance is Rs290bn/320bn. At USD50/bbl oil and USD3/mmbtu gas prices, cash flows should break even. The gas subsidiary should bid and buy ONGC’s own gas. ONGC wants to consolidate multiple gas segments into one unit but it would not involve any major capex. Group entities, including MRPL-OMPL, HPCL and OPaL, would require 2.5-4.0mmtpa. OPaL has operated at 100%+ capacity in the last three months and 9MFY21 losses were down to Rs5.29bn. The OMPL-MRPL merger should happen this year followed by MRPL-HPCL. There are ways to prepone it from FY24 theoretical timeline

Valuation: We raise target multiple on potential gas pricing reforms. FY21/22/23E Brent is raised to USD43.5/55/56 per barrel. We value listed investments at a 50% holdco discount.

Key risks: Adverse oil-gas prices, policy issues, cost overruns and dry holes

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