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Concerns over delay in gas production continue

* ONGC reported in-line numbers and crude oil sales; lower gas sales were offset by higher-than-estimated VAP sales. Gas offtake was lower due to lower offtake from GAIL, led by shutdowns at the customer end.

* Gas production continues to decline on a sequential basis. The management has guided for gas production potentially at 24.7bcm for FY22, while gas production would be lower than earlier guided at 27bcm for FY23.

* Delays in production at the KG-DWN-98/2 field continue amid restrictions on international movement due to COVID. The guidance is that gas production from the field may be ramped up to 3mmscmd by Dec’21, with a further ramp-up expected by Jun’22. The peak production is expected at 14.5mmscmd/45kbopd for gas/oil respectively.

* In line with the aforementioned delays, we shift our production estimates of 24mmt/27.8bcm to FY24E and lower our FY23E estimates to 23.2mmt/25.8bcm.

* ONGC expects 2HFY22 APM price to rise above USD2.8/mmbtu (from USD1.79 currently), with APM price significantly expected to increase in 1HFY23 as well.

* Brent prices have started cooling off from the peak of USD75/bbl in Jul'21 to ~USD70/bbl. We expect prices to return to normal levels of USD60–65/bbl as OPEC+ gradually increases its oil production (by 0.4mnbopd per month from Aug'21). We forecast Brent price of USD63/USD60 per bbl for FY22E/FY23E, considering the easing of the current 5.8mnbopd production cuts.

* Despite the continued delay, ONGC’s gas production is likely to clock a CAGR of 7% over FY21–24E, with efforts to arrest the decline in oil production.

Result in line with estimates

* Crude oil sales were in-line at 5.1mmt (-1% YoY and -3% QoQ). Although, gas sales were lower at 4.1bcm (-8% est.; -3% YoY and -7% QoQ). On the other hand, VAP sales were better than expected at 784tmt (+13% est.; +15% YoY and +8% QoQ).

* Net realization was in line with estimates at USD65.6/bbl (+128% YoY and +13% QoQ). Thus, revenue was in-line at INR230b (+77% YoY and +9% QoQ).

* EBITDA stood at INR121.5b (+106% YoY and +20% QoQ). Higher interest cost was offset by higher other income, while depreciation was lower.

* Reported PAT stood at INR43.3b (v/s INR5b/INR67b in 1Q/4QFY21).

* OVL PAT stood at INR9.2b (v/s loss of INR3.3b in 1QFY21 and gains of INR10.2b in 4QFY21).

Valuation and view – maintain Buy

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

* OPAL reported profits for the second consecutive quarter, with utilization at 87% in 1QFY22. EBITDA stood at INR9.7b in 1QFY22 (v/s INR11b in 4QFY21), with PAT at INR0.65b (v/s INR0.27b in 4QFY21). ONGC is further improving process efficiencies to maintain profitability.

* ONGC is trading at 2.4x FY23 EV/EBITDA and 4.5x FY23 PE. We value the company at 10x Sep’23E adj EPS of INR11.6 and add the value of investments to arrive at TP of INR150. Reiterate Buy.

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