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Turnaround in operating metrics likely

We recently met ONGC management (on Dec 16, 2022) to get a sense of their business and future prospects. Presented below are the key takeaways:

* Brent remains strong despite recent reverses: Brent crude prices have moderated to US$81/bbl levels (last 1-month average) driven by continued global economic concerns and the resurgence of covid in China as they have loosened lockdown restrictions. However, despite windfall tax impact, net realisation for ONGC may stay at US$75/bbl levels, which is US$18/bbl higher than the average realisation over FY15-22. At our FY23E and FY24E estimates of Brent crude @US$90/bbl levels, we see ONGC’s net realisation remaining at ~US$75/bbl – well above its historical averages.

* Production growth to improve: ONGC’s MoU targets (standalone, excluding JV share) of 21mt (+8% YoY) of oil and 24.3bcm of gas (+18% YoY) are ambitious and predicated on the commencement of KG 98/2 asset after 2 years+ of delays. With an estimated ~12mmscmd of gas and ~40kb/d of oil production expected by FY25E, KG asset will entirely account for ~2mtoe of oil and most of ~5bcm/y gas output boost expected by FY25E. Delays in the arrival of Floating Production and Storage Offloading (FPSO) unit , which was a major constraint in the project startup, has entered Indian waters as of last month and with the installation of the same by January, there is greater certainty and visibility on the timelines of KG asset. ONGC is also guiding to flat oil and marginal uptick in gas output of OVL for FY24E.

* We remain 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.

* Gas price recommendations are largely positive: The Kirit Parikh Committee recommendations of a price floor of US$4/mmbtu and a cap of US$6.5/mmbtu for APM gas, retaining premium for difficult fields and proposing a gradual movement to free pricing in 3 years (annual escalation of US$0.5/mmbtu till then) is a material positive. ONGC has a production and development cost of only US$3.5/mmbtu for most of its legacy fields and has seen an average blended realisation of only US$3.7/mmbtu over FY15-22.

* Strong earnings growth ahead; BUY: We estimate an EPS CAGR of 19% over FY22-24E, driven by assumptions of US$75/bbl crude realisation, US$7.8/mmbtu gas realisation and a CAGR of 3.9% in overall group production (including OVL). Valuations of just 2.7x FY24E EPS, 2.2x EV/EBITDA and 0.5x P/BV remain attractive. 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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