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Oil & gas surge to drive growth & upside

ONGC’s Q1FY22 standalone EPS was up 8.7x YoY on surge in oil and value added products (VAP) realisation while consolidated EPS was up 51.6x YoY due to subsidiary OVL and associates being in the black vs in the red in Q1FY21. FY22-FY23EE Brent at latest futures is 4-3% higher than base case and LPG price for FY22E is 41% higher than base case.

Given the surge in UK NBP, Henry Hub (HH) gas and spot LNG prices and futures, 34-45% upside to our FY23E deepwater and APM gas price estimates appears likely. Gas and VAP volumes may be lower than estimate but higher oil, gas and LPG realisation based on latest futures, would mean 6-21% upside to FY22-23E EPS. Reiterate BUY.

* Q1 EPS up 8.7x YoY on oil and VAP price jump: ONGC’s Q1FY22 standalone EPS was up 8.7x YoY driven by rise in realisation of oil by 2.2x YoY, VAP by 19- 136% YoY and naphtha and C2, C3 and C4 volumes by 12-81% YoY. Q1 gas price realisation was down 27% YoY and oil and gas sales volume down 1-3% YoY. Consolidated EPS was up 51.6x YoY on a very low base driven by OVL (profit of Rs9.15bn vs Rs3.34bn loss in Q1FY21) and associates (share of profit Rs6bn vs loss of Rs5.6bn in Q1FY21) being in the black vs in the red in Q1FY21.

* FY22E-FY23E Brent at latest futures is 4-3% higher than base case: Based on latest futures, FY22E Brent is 4% higher than our estimate of US$67.5/bbl at US$70.3/bbl and FY23E Brent is 3% higher than our estimate of US$65/bbl at US$67.1/bbl. Assuming FY22E-FY23E Brent based on latest futures, there would be 7% upside to FY22E EPS estimate and 4% upside to FY23E EPS estimate.

* 34-45% upside to FY23E deepwater and APM gas price: HH and NBP strength augurs well for APM gas price and spot LNG strength for deepwater gas price. FY23E APM gas price based on NBP and HH futures at US$6.15/mmbtu is 45% above base case of US$4.25/mmbtu and deepwater gas price at US$11.27/mmbtu based on JKM LNG futures is 34% above base case price of US$8.4/mmbtu.

* FY22E-FY23E EPS up 72-31% YoY; 6-21% upside to FY22-FY23E EPS at latest oil, gas and LPG futures: We estimate 1) FY22E EPS to be up 72% YoY driven by 51% YoY jump in Brent to US$67.5/bbl and 2) FY23E EPS to be up 31% YoY driven by 48-65% YoY rise in deepwater and APM gas prices and rise in output from ONGC’s KG basin deepwater block. Higher oil, gas and LPG prices are likely to mean upside but gas volumes may be lower than estimated.

Net impact is upside to: 1) FY22E EPS of 6% based on 4% higher Brent than base case at US$70.3/bbl and 41% higher LPG price than base case at US$649/t (latest futures) but 9% lower gas volumes and 2) FY23E EPS of 21% based on 3% higher Brent than base case, 34-45% higher deepwater and APM gas price than base case but 7% lower gas volume than base case. ONGC’s share price discounts long-term Brent of just US$49/bbl. It is attractive at FY22-FY23E P/E of 5.4- 4.1x, EV/EBITDA of 3.7-3.3x, P/BV of 0.61-0.56x and dividend yield of 6.2- 8.3%.

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