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Production growth triggers in place

For the past three months, ONGC (ONGC IN) performance was similar to the benchmark Nifty Index (down 1-4%), as volatile crude oil price impact was offset by rising visibility on oil & gas production for the next three years. Standalone production performance during QoQ was encouraging and its recent plan to increase reserve recovery by 60% from the flagship Mumbai High field would bring much-needed production growth prospects beyond FY27. Additionally, administered price mechanism (APM) gas prices would increase by USD 0.25/mmbtu each year until FY27 as per the Kirit Parekh Committee report. Therefore, we reiterate Buy with a SOTP-based TP of INR 327.

EBITDA up 11% YoY, led by higher production, realization and INR weakening:

Q3 EBITDA at INR 190bn vs our estimates of INR 184bn, was up 11% YoY, because of fall in statutory levies, which resulted in 2% crude oil realization growth. Oil & gas production (ex of JV) up 3-4% YoY and the USD-INR rate weakened by 1% YoY. However, PAT at INR 82.4bn vs our estimates of INR 107.5bn fell 17% YoY due to the jump in depletion cost to INR 49bn, up 31%, with commissioning of the KG field and other income of INR 18bn, down 47%. QoQ production growth was up 5% each for crude oil and natural gas.

Rerating trigger #1 -- KG field ramp-up in CY25:

Current KG-98/2 field oil production is at 35,000bpd and ONGC expects it to ramp up to 45,000bpd and gas production to reach 10mmscmd from the current ~3mmscmd in CY25. Therefore, ONGC has set a target of oil & gas production of 44.5mn tonne, up 7% YoY, and 45.6mn tonne, up 2.5% YoY, of oil equivalent for FY26 and FY27, respectively.

Rerating trigger #2 -- enhancing Mumbai High reserve recovery by 60%:

Post collaboration with technical service provider (TSP), indicated incremental production by TSP in Mumbai High (MH) field from baseline production level is 60% over a period of 10 years, which we estimate will increase MH oil & gas output by ~40% from the current level of ~11mn ton oil equivalent by FY28. We believe successful implementation of MH output increase by TSP will lead to ~5% oil & gas production CAGR during FY24-28E. Enhanced gas production from KG and MH would attract premium pricing of 12% of crude oil price.

Price chart

We reiterate Buy with a TP at INR 327:

We expect ~5% oil & gas production CAGR during FY24-28E and higher natural gas realization from new wells & fields of nominated blocks. We cut our consolidated EPS by 19% for FY26E and by 11% for FY27E, due to reduced profitability estimates of subsidiaries and lower international crude oil prices. But we keep our TP unchanged at INR 327 as we ascribe a higher FY27E EV/EBITDA at 4.8x (from 4.5x) due to production growth visibility. We believe valuation multiple will further increase with the rise in oil & gas production of KG and MH fields. Our SOTPbased TP assumes crude oil realization at USD 75/bbl, gas realization at USD 7.3 per mmbtu for FY26E and USD 7.6 per mmbtu for FY27E, ONGC Videsh oil & gas reserves based on EV/boe at USD 3.5x (from USD 2.6/boe) and investments in listed entities at a 50% discount to the CMP.

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