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EBITDA meets estimates; production subpar, while PAT marginally beats on lower taxes

ONGC’s Q2FY25 earnings saw in line EBITDA despite a lower crude and gas production and sales. The crude net realization was higher than our estimated while PAT marginally beats on lower taxes. Crude production experienced YoY & QoQ decline, and natural gas saw YoY decline but marginal QoQ recovery, an increase in production from both oil & gas, especially from KG basin remains the key. Other expenses and other income were in line, there was dividend income of Rs30.7bn. OVL's topline performance improved in crude but declined in gas with the volumes increased for crude and lagged in gas production. OVL’s profitability deteriorated YoY & QoQ. We maintain a BUY rating on ONGC, with a revised TP of Rs 355/sh.

Result Highlights

* Performance: EBITDA/Adj. PAT was at Rs 182.4/119.8bn was -0.7/+17.3% YoY and -2%/+34.1% QoQ. (note: Exploration write-off costs are taken below EBITDA). EBITDA was in line with our estimates despite marginally lower product sales while PAT surpassed expectations on lower taxes and production for oil & gas remained subpar.

* Crude production: was down 1.7% YoY and 1.5% QoQ to 5.16mmt (was lower than the company target), the shortfall is primarily due to delays in key projects compounded by water cut issues and torrential disruptions causing power outages.

* Natural gas production: was down 2.7% YoY but up 1% QoQ to 5.06bcm, below target on underperformance from wells, reservoir decline in Ankleshwar, delays in well drilling, pipeline connections in Tripura, planned well closures.

* Crude and Gas realization: Net crude realization was up 0.4% YoY and 0.6% QoQ to USD 74.9/bbl. The gas realization was at USD 6.5/mmbtu. Windfall taxes stood at USD 3.5/bbl vs USD8.6/bbl the last quarter.

* Depreciation including exploratory write-off stood at Rs 68.1bn up 14.3% YoY but down 9.7% QoQ. Finding cost: increased to 10/bbl, below last 3 years’ average. The statutory levies as a % of revenue stood at 23.1% (versus 30.7% YoY and 27.7% QoQ).

Other expenses at Rs 56.5bn (was up 4% YoY and 6% QoQ). The other income at Rs47.6bn, up 128.5% YoY and 131.2% QoQ, including a dividend income of Rs30.7bn in line to our expectations.

* OVL performance: production for crude at 1.82mmt (vs 1.77 YoY and 1.79 QoQ) and gas at 0.71bcm (vs 0.81bcm YoY and 0.72bcm QoQ) was weakest ever. The EBITDA at Rs 9.9bn was down 2.7% YoY and 15.5% QoQ while PAT at Rs 3.3bn was up 2.5% YoY but down 28% QoQ. OPAL stake: During the quarter, following an approval from MoP&NG, ONGC has converted a portion of its Compulsory Convertible Debentures (CCD) worth Rs61bn into equity, raising its shareholding in OPaL from 49.36% to 95.69%, total investment at Rs 183.7bn.

* H1FY25 Performance: EBITDA/Adj. PAT was at Rs 368.5/209.2bn vs Rs 378.1/202.3bn in H1FY24. Crude production was down 1.6% at 10.4 mmt, natural gas production was down 3.4% at 10.1bcm. Net crude realization was down 1.2% to USD74.6/bbl. Dividend: Board approved an interim dividend of Rs 6/sh (!36% payout on H1 earnings) with 20th Nov’24 being the record date.

Valuation

We maintain a BUY rating on ONGC, with a revised TP of Rs 355/sh (Rs 402 earlier). Our TP of Rs 355/sh comprises of a) Rs 291/sh for the stand-alone domestic business, valued on 4x EV/EBITDA FY27e, b) Rs 5.7/sh for OVL on PER of 8x FY27e, c) Rs 58/sh for investment in listed equities, valued at 30% hold-co discount to market price.

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