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Earnings miss estimates on higher expenses

Our view

ONGC’s 4QFY22 reported operating profit at Rs 160.5bn stood below our (YES: Rs 189bn) and street (Rs 188.4bn) estimates. The miss on estimates stemmed primarily from higher than estimated a) operating expenses and b) survey & drywell expenses, even as revenue stood in-line. The strong YoY growth in operating profits was driven by a sharp 64% YoY increase in crude oil realization to USD 95/bbl, even as production of crude oil and natural gas stood lower by 3% YoY and 4% YoY respectively. ONGC’s crude oil and natural production has been on a continual YoY decline for past 18 and 11 quarters, respectively, on natural decline in aging fields along with absence of any new ‘significant’ discovery. A rally in global crude oil and natural gas prices is key driving factor behind ONGC’s profitability and any moderation thereof would have a concomitant impact on its operating cashflows even as capex requirement continue to remain high, in order to maintain production from old aging fields. REDUCE.

Result Highlights

* Profitability: Operating Profit and Adj. PAT stood at Rs 160.5bn (+97% YoY; +8% QoQ) and Rs 88.6bn (+115% YoY; +1% QoQ), below estimates, on higher than estimated operating costs. While the survey and drywell expense stood 29% YoY and 127% QoQ higher at Rs 25.4bn, the operating expense stood 17% YoY and 35% QoQ higher at Rs 54bn.

* Crude Oil Production: Crude oil production continued to slide and stood 2% YoY & 1% QoQ lower at 4.85mmt for ONGC -SA and at 5.39mmt (-3% YoY;-1% QoQ) along with JV. The decline in production stemmed from a) impact of cyclone Tauktae in western offshore & onshore and b) modification work at Hazira

* Natural Gas production: ONGC’s NG production (along with JV) as well declined by 4% YoY & QoQ to 58.3mmscmd (vs 62mmsmcd (-7% YoY) in 4QFY21).

* Realization: The crude oil realization during the quarter stood QoQ higher at USD 94.98/bbl (3Q: USD 75.7/bbl); The natural gas realization on the other hand stood QoQ flat at USD 3.1/mmbtu

* OVL: The Revenue, Ebitda and Adj PAT, during the quarter stood at Rs 44.36bn (+14% YoY; -6% QoQ), Rs 26bn (-8% YoY; -14% QoQ) and Rs 8.67 bn (-14% YoY ; -6% QoQ). However, on un-adjusted basis (for exceptional item of Rs 20.7bn), OVL reported a loss of Rs 12bn during the quarter. OVL’s production declined during the 4QFY22 and FY22 on account of a) expiry of contracts in Block 0.6.1, Vietnam & MECL Columbia, b) impact of flood on production in Sudan and c) natural decline

* Dividend: ONGC announced a final dividend of Rs 3.25/sh, over and above the interim dividend of Rs 7.25/sh.

Valuation

We maintain our REDUCE rating on ONGC, with a TP of Rs 150/sh, as we believe that inspite of current high crude oil price environment, in the longer run, alleviation of geopolitical tension, restoration of demand-supply balance and focus on sustainable energy would likely put a lid on crude oil rally. Our TP of Rs 150/sh comprises of a) Rs 114/sh for the stand-alone domestic business, valued on DCF basis (Terminal value : Rs 0; WACC: 13%) , b) Rs 7.3/sh for OVL on EV/EBITDA of 4x FY24e and c) Rs 28/sh for investment in listed equities, valued at 20% hold-co discount to 3M average market price

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