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Production drag persists; valuations factor in USD62/bbl Brent

* ONGC’s 2QFY27 standalone revenue came in line with our est. at INR439b. Crude oil/gas sales were 4%/4% below our est. at 4.4mmt/3.8bcm. However, reported oil realization was USD92.3/bbl (est: INUSD90/bbl). Crude oil production was down 1%/5% QoQ/YoY, while natural gas production was down 2% YoY and up 2% QoQ. SA EBITDAX/APAT came in 6%/10% above our est. at INR263b/INR155b. Depreciation, dry well write-offs and other income came in higher than estimates.

* Things we liked about the result:

1) ONGC awarded two Western Offshore development projects (MBOSN-2005-1/SD-4/BS-17 and Ratna-1/NLM-14 additional development) with a combined capex of ~INR118b, expected to unlock ~22mmtoe of hydrocarbons, along with PRP-X (capex >INR43b) to replace ageing subsea pipelines

2) bp’s TSP role has been extended to the entire Western Offshore, with the TSP-2 team mobilized in Aug’26, and interventions under TSP-1 are already showing early results

3) Under Samudra Manthan, the first exploratory well in the Mahanadi deepwater block proved gas-bearing, with four wells planned in FY27 and up to 13 in FY28; two onland discoveries (Amraghat-1 and Vadatal-48) were also notified during the quarter

4) At KG-98/2, three gas wells are planned for hook-up in 4QFY27, adding ~1.5mmscmd

5) OPaL turned EBITDA-positive at INR1.47b in 2QFY27, aided by the rebound in petchem prices.

* Key investor concerns:

1) Crude oil production declined 1%/5% QoQ/YoY, while natural gas production fell 2% YoY (up 2% QoQ), due to reservoir complexities at KG-98/2, monsoon-related delays at PRP-8 and PRP-9, and lower onshore offtake after disruptions at major consumer facilities. Management expects FY27 production of ~39mmtoe, with only a 0.5- 1mmtoe increase in FY28

2) OPaL remains loss-making, with a 2Q net loss of INR4.94b (1HFY27: INR11b) amid higher feedstock prices

3) Completing 13 Samudra Manthan wells in FY28 depends on securing additional rigs in a tight deepwater rig market

4) Venezuela legacy dues of ~USD500m remain unresolved, and no profits have been repatriated to date.

* Valuation and view:

* Given continued weakness in production, we cut our domestic production estimates (incl. JVs) for FY27/28 to 39.2/39.9mmt from 40.4/41.1mmt earlier. As a result, we lower our FY28 consolidated/standalone EBITDA estimates by 5%/7%. We estimate that ONGC’s current valuation implies a Brent crude price of ~USD62/bbl over 4QFY27-FY28, well below our FY28 Brent assumption of USD75/bbl. We believe current valuations are inexpensive. We model ~1% annual decline in volumes over FY26-28 and value the standalone business at 6.5x Dec’27E EPS, investments at a 25% discount to CMP, and OVL stake at 0.5x FY25 BVPS to arrive at our TP of INR285. Reiterate BUY.

*ONGC currently trades at 5.2x FY28E consol. P/E, below its long-term average one-year forward P/E of 6.3x. Adjusting for the value of listed investments at 25% discount (INR65/share) and our valuation of OVL (INR23/share), we estimate that the market is pricing in a Brent crude price of only ~USD62/bbl for ONGC’s core business over 4QFY27-FY28, well below our FY28 Brent assumption of USD75/bbl. We believe this is overly conservative given the current industry backdrop and that valuations remain inexpensive.

* Given continued weakness in production, we cut our domestic production estimates (incl. JVs) for FY27/28 to 39.2/39.9mmt from 40.4/41.1mmt earlier. As a result, we lower our FY28 consolidated/standalone EBITDA estimates by 5%/7%. We model ~1% annual decline in volumes over FY26-28 and value the standalone business at 6.5x Dec’27 EPS, investments at a 25% discount to CMP, and OVL stake at 0.5x FY25 BVPS to arrive at our TP of INR285. Reiterate BUY.

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