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Earnings buoyant on higher crude

Our view

ONGC’s 3QFY22 operating profit at Rs 148.5bn (+128% YoY; +19% QoQ), stood slightly below our and street estimates, on higher than anticipated operating expenses. The PAT at Rs 87.7bn (+536% YoY; -52% QoQ), nevertheless stood above our and street estimates on higher other income. The QoQ decline is on account of reduction of Rs 85.4bn in deferred taxes in 2QFY22, on introduction of section 115BAA of IT act. We believe that recent rally (+81.2% in 12M & 14% in 3M) in ONGC’s stock prices is largely fueled by high crude oil and natural gas prices, even as its production is on decline and capital expenditure on the rise to sustain the falling production. Additionally, the sharp rally in crude oil prices while spectacular, but is most likely unsustainable. We continue to believe that normalization of supplies, in the near term and a push for sustainable renewable energy, in the longer run would act as dampener for crude oil prices. Maintain REDUCE, with a target price (TP) of Rs 150/sh.

Result Highlights

Profitability: Operating Profit and PAT stood at Rs 148.5bn (+128% YoY; +19% QoQ) and Rs 87.7bn (+536% YoY; -52% QoQ). The operating profits improved YoY and QoQ, primarily on higher crude oil and natural gas realization, even as crude oil and natural gas production declined by 3%

Crude Oil Production: Crude oil production continued to slide and stood 3% YoY lower at 4.9mmt for ONGC -SA and 5.45mmt (-3% YoY) along with JV. The drop in production was primarily on lower production from WO-16, due to delayed MOPU mobilization, supply disruption Cluster-8 and loss of production from Ratna and R Series.

Natural Gas production: Like the trend seen in crude oil production, ONGC’s NG production as well declined by 6% YoY during the quarter, clocking in at 57mmscmd (vs 61.2mmsmcd in 2QFY21). The decline in production was attributable to a) less production from WO-16; b) less than planned production from Vasistha /S1 well, c) delay in gas production from UI field of KG 98/2, and d) lower production from Tapti Daman block and e) less than envisaged production from Mandapeta field.

OVL: The crude oil and NG production for OVL stood at 1.959mmt (-9% YoY) and 1.118bcm (-1% YoY). The revenue at Rs 47.2bn, stood higher by 46% aided by higher crude oil prices, and accordingly EBITDA at Rs 30bn stood higher by +64% YoY

Capex: ONGC has a planned capex of Rs 320bn for FY22 and FY23; also has plans of infusing Rs 50bn in OPAL.

Valuation

We maintain our REDUCE rating on ONGC, with a revised TP of Rs 150/sh (from Rs 145/sh), as we revise our crude realization upwards for FY23, given the current price environment. Our TP of Rs 150/sh comprises of a) Rs 115/sh for the stand-alone domestic business, valued on DCF basis (Terminal value : Rs 0; WACC: 13%) , b) Rs 2.5/sh for OVL on EV/EBITDA of 4x FY23e and c) Rs 33/sh for investment in listed equities, valued at 20% hold-co discount to 3M average market price.

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