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EBITDA in-line; production challenges continue

* ONGC reported revenue 6% below our estimate on lower realization (-5% est., at USD69.4/bbl) and gas sales (-6% est., 4.3bcm), although EBITDA was in-line (at INR132b).

* The company highlighted that oil and gas production declined in 1HFY22, primarily due to restrictive conditions created by cyclone Tauktae as well as the impact of COVID. Further delay in the mobilization of MOPU to the WO-16 Cluster project impacted production from this field. Gas production from the KG Basin (currently at 0.6–0.7mmscmd) continues to get delayed as international travel restrictions continue to impact logistics.

* As a result, the management has revised down its oil and gas guidance for FY22E to 22mmt/22bcm (from 23mmt/25bcm earlier). Our estimates were already conservative and thus remain unchanged. Furthermore, we build in modest production estimates at 23mmt/24mmt for oil and 25.8bcm/27.8bcm for gas (v/s 27bcm guided by the company for FY23) for FY23E/FY24E

* Brent prices continue to record an uptick, led by the gas to oil switch, creating additional demand of 0.5mnbopd, with continued lower supply from OPEC+ (production cuts still at ~4mnbopd), resulting in inventory draws. We maintain our stance on the normalization of Brent prices by endFY22 and build in assumptions of USD69/bbl / USD65/bbl / USD60/bbl for FY22E/FY23E/FY24E.

* The expectation of a severe winter, coupled with supply constraints and lower inventory, has led to gas prices at international hubs trading at multiyear highs. Considering the same, we build in gas price assumptions of USD2.6/mmbtu / USD5/mmbtu / USD4/mmbtu for FY22E/FY23E/FY24E.

* Despite the continued delay and modest assumptions, ONGC’s gas production is likely to clock in a CAGR of 7% over FY21–24E, with efforts to arrest decline in oil production. An interim dividend of INR5.5/share has been announced (translating to dividend yield of 3.5% at CMP). We maintain a Buy rating.

EBITDA in line with estimates

* The company reported revenue of INR243.5b, 6% below our estimate. Net realization was 5% below our estimate at USD69.4/bbl (+6% QoQ).

* Oil sales were in-line at 5mmt (-1% YoY, -2% QoQ). 

* Gas sales were 6% lower than estimated at 4.3bcm (-7% YoY, +4% QoQ).

* VAP sales stood at 777tmt (-7% YoY, -1% QoQ).  EBITDA was in line with our estimate at INR132b (+57% YoY, +9% QoQ).

* Lower depreciation and higher other income resulted in PBT coming in around 18% above estimate at INR111.5b. The company realized the option of the new tax regime and recorded deferred tax benefit of INR98.5b during the quarter.

* Reported PAT came in at INR183.5b, while adj. PAT for taxation stood at INR85b (v/s INR43b in 1QFY22 and INR36b in 2QFY21).

Valuation and view – maintain Buy

* 1HFY22 revenue was up 58% YoY to INR474b, weighed by improved realization to USD67.5/bbl (v/s USD35 in 1HFY21) and decline in gas production by 5% YoY to 8.3bcm. Oil production was flat YoY at 10.1mmt, with VAP production up 3% YoY to 1,561tmt. EBITDA stood at INR254b (+77% YoY), with adj. PAT coming in at INR128b (v/s INR41b in 1HFY21).

* Capex guidance for FY22 remains unchanged at INR295b.

* Peak production at the KG Basin is expected at 14.5mmscmd/45kbopd for gas/oil. OPAL’s performance is steady, and ONGC is improving process efficiencies to keep its profits positive.

* The upward revision in EPS comes amid the change in tax rate for the company (new tax regime).

* ONGC is trading at 2.4x FY23E EV/EBITDA and 3.9x FY23E PE. We value the company at 10x Dec’23E adj EPS of INR16.2 and add the value of investments to arrive at TP of INR195. Reiterate Buy.

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