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EBITDA in line; continued production challenges seen ahead

* ONGC reported in-line revenue with realization at USD75.4/bbl (+75% YoY, in line) and gas sales at 4.3bcm (-4% YoY). EBITDA also stood in line at INR159.7b (+91% YoY, +21% QoQ).

* Management has guided for production of 21mmt/24.3bcm of oil/gas for FY23E and 24mmt/32bcm of oil/gas for FY24E, respectively. Our estimates were already conservative and thus remain unchanged. Further, we build modest production estimates at 22/23mmt for oil and at 21.7/25.8bcm for gas for FY23E/24E, respectively.

* Although we expect crude oil prices to hover at USD60-70/bbl in the long run, the prevailing strength made us raise our FY23/FY24 forecasts by USD5/bbl each to USD70/65 in our previous report. We have also rationalized Brent Crude oil prices at USD85/bbl for 4QFY22E. We build in domestic gas prices at USD6.6/USD4 per mmBtu for FY23E/FY24E.

* Commercial inventories of the US oil and liquids have declined to 1.18bnbbl in Dec’21 from 1.34bnbbl in Dec’20. Commercial oil and liquid inventories in OECD have also declined to 2.7bnbbl in Dec’21 from 3bnbbl in Dec’20. The drop has been led by a sharp rise in oil demand, delays in the ramp up of newly discovered fields, and lack of adequate supply from OPEC+.

* Despite the modest assumptions, ONGC’s gas production is likely to clock 7% CAGR over FY21-24E, with efforts to arrest decline in oil production. We value the company at 10x FY24E Adj. EPS of INR19.2 and add value of investments to arrive at our target price of INR225. Maintain Buy.

In-line revenue and EBITDA; announced second interim DPS of INR1.75

The company reported in-line revenue at INR284.7b.

* Crude oil/gas sold was at 5.1mmt/4.3bcm, both in line with our estimates. VAP sold stood at 724tmt (6% lower than our estimate, down 8% YoY and 7% QoQ).

* EBITDA stood at INR159.7b (up 91% YoY and 21% QoQ).

* Reported PAT came in at INR87.6b (7% higher than our estimate, up 597% YoY, but down 52% QoQ).

* The company announced a second interim dividend of INR1.75/share, in addition to its first interim dividend of INR5.5/share in 2QFY22.

Valuation and view – Reiterate BUY

* For 9MFY22, ONGC’s revenue was up 62% YoY to INR759b due to improvement in realization to USD70.2/bbl (v/s USD37.8 in 9MFY21) with decline in gas production by 4% YoY to 16.3bcm. Oil production was flat YoY at 16.3mmt. EBITDA was at INR414b (+82% YoY), and Adj. PAT stood at INR216b (v/s INR53.9b in 9MFY21).

* Management guided for a capex of INR300b for the enhanced production targets set by the company at 63mmtoe (including JV) for FY25E and 60mmtoe for FY24E as the major thrust remains on the East Coast projects.

* The peak volumes at KG basin are expected in FY23, with incremental oil production at 2.2mmt and gas production at 10.1mmscmd. OPAL’s performance is steady although it incurred a loss (on the PAT level) in 3QFY22.

* 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 3x jump in FY24E Adj. PAT v/s that of FY21 on a standalone basis.

* ONGC is trading at 2.3x FY24E EV/EBITDA and 6.8x FY24E P/E. We value the company at 10x FY24E Adj. EPS of INR19.2 and add the value of investments to arrive at our TP of INR225. Reiterate BUY with a 35% potential upside.

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