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Oil realization hit by windfall tax; production guidance strong

* ONGC’s 2QFY23 EBITDA was in line with our estimate at INR188.1b (+42% YoY, -27% QoQ) with oil realization at USD72/bbl (after taking the effect of windfall tax during the quarter). Crude oil and gas sales both were in line with our estimates at 4.8mmt and 4.2bcm, respectively.

* The FPSO for KG Basin would arrive in Jan-Feb’23E with first oil likely in May’23E. Production guidance from KG Basin stands at 1.9mmt for oil and 2.8bcm for gas in FY24E; at peak production, the same could be 45kbopd and 12mmscmd, respectively, in FY25E.

* After a long time, the production of oil and gas appears improving. Domestic production of oil is expected at 22.8mmt in FY23, 24.6mmt in FY24 and 25.7mmt in FY25. Gas production guidance, on the other hand, stands at 22.1bcm in FY23, 25.7bcm in FY24 and 27.5bcm in FY25.

* The windfall tax has been gradually reduced to ~INR9,500/mt in Nov’22 to date from INR23,250/mt in Jul’22, in line with the decline in oil prices. Consequently, we have raised our net oil realization for 3QFY23E to USD79/bbl, which has led to an upgrade in our revenue/EPS estimates by 7%/11% on standalone basis, respectively, for FY23.

* However, with no end in sight to the Russia-Ukraine conflict and proactive quota management by OPEC+, we expect Brent crude oil prices to stay elevated at ~USD100/USD90 per bbl in FY23/FY24, respectively, thereby possibly extending the windfall tax into CY23 as well.

* ONGC is trading at 2.2x FY24E EPS of 63.8 on consolidated basis. We value the company at 3.5x FY24E Adj. EPS of INR43.4 and add value of investments to arrive at our TP of INR192. Maintain BUY.

Beat on Revenue, EBITDA in line

* ONGC reported revenue of INR383.2b in 2QFY23. However, netting windfall tax of INR64.5b, revenue came in at INR319b, in line with our estimates.

* Gross oil realization stood at USD95.2/bbl. Netting windfall tax, realization stood at USD72/bbl.

* EBITDA stood in line at INR188.1b (+42% YoY, -27% QoQ). Reported PAT came in at INR128.3b (+25% est.; -30% YoY, -16% QoQ) owing to higherthan-estimated other income.

* For 1HFY23, ONGC’s revenue stood at INR806.4b (+70% YoY) with EBITDA at INR447.4b (+76% YoY). Reported PAT grew 24% YoY to INR280.3b.

* Net oil realization stood at USD90.3/bbl (+34% YoY).

* The company announced an interim dividend of INR6.75/share.

Valuation and view

* Although the ramp up in oil and gas production has been a sore issue for investors, the rise in oil and gas prices is likely to result in a 1.5x jump in its FY24E adj. PAT v/s that of FY22 on a standalone basis.

* The management is also confident of arresting and reversing the decline in both oil and gas production in the coming three years. Peak production is also likely to be achieved at the KG basin in FY25E with gas already under production from three wells.

* ONGC is trading at 1.4x FY24E EV/EBITDA and 2.2x FY24E P/E. We value the company at 3.5x FY24E adj. EPS of INR43.4 and add the value of investments to arrive at our TP of INR192. Reiterate BUY with a 35% potential upside.

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