Buy ONGC Ltd For Target Rs.230 by Motilal Oswal Financial Services Ltd
Volume guidance cut, price outlook muted
? ONGC’s 1QFY26 revenue came in 5% above our est. at INR320b. Crude oil/gas sales were in line with our est. at 4.7mmt/3.9bcm. VAP sales stood at 616tmt (est. 633tmt). Reported oil realization was USD66.1/bbl, representing a USD0.9/bb discount to Brent during the quarter. EBITDAX also stood 12% above our est. at INR186.6b, while PAT of INR80.2b was 4% above our est. DDA, dry well write-offs, and survey costs stood above estimates, while other income came in below estimate, impacting profitability.
? Upstream has remained our least preferred sector since Jun’24: We have been bearish on crude oil prices since Jun’24 when Brent oil prices were USD83/bbl amid record-high OPEC+ spare capacity (Oil price outlook: Has the crude oil party peaked?). Since then, Brent prices have corrected 23%, while ONGC’s stock price has corrected 13%. In the past few quarters, strong volume growth guidance by ONGC, after years of under-investment and sluggish volume trajectory, has fueled investor enthusiasm in upstream stocks. While we have had a BUY rating on ONGC, upstream has been our least preferred sector (Upstream remains our relatively less preferred sector despite cheap valuations).
? In the past few quarters, ONGC has struggled to raise production/sales, with no YoY production/sales growth in 1Q.
? Cut FY26/FY27 SA earnings estimates by 6%/11%; higher gas realization argument under pressure: Given continued weak volume growth, we cut our FY26/FY27 SA EPS estimates for ONGC by 6%/11%. While we like increased exploration intensity (which is key to building a robust development pipeline), we believe this will likely be accompanied by higher dry well write-offs, which will weigh on earnings.
? Benefits of increased new well gas proportion for ONGC will be mostly offset by subdued gas realization amid a weaker crude oil price outlook.
? On our revised estimates, ONGC is estimated to report SA PAT CAGR of -8% over FY25-27. Given a sluggish earnings outlook, we cut FY27 PE multiple to 6x. Our SA PAT estimates for ONGC are 14%/22% below Street estimates for FY26/FY27.
? Oil prices may remain under pressure amid record-high OPEC+ spare capacity: Current OPEC+ spare capacity is 4.6mb/d, which is at a multi-year high. OPEC+ has already accelerated the unwinding of 2.2mb/d spare capacity in a bid to increase its market share. Further, tariff-related uncertainty can lead to soft world GDP growth, and therefore oil demand may remain under continued pressure.
? Lastly, a weaker oil price outlook also raises risks of further impairments, especially for ONGC’s overseas assets.
? Key risks/monitorables to watch out for:
? While we build in a crude oil price of USD65/bbl in FY26/FY27, downside risks to crude oil price remain elevated.
? Cut to Street earnings estimates as ONGC SA guides for 5% volume CAGR over FY25-27, which we believe is aggressive.
? Considering the above factors, we downgrade ONGC to Neutral. We arrive at our SoTP-based TP of INR230 as we model a CAGR of 2%/4% in oil/gas production volume over FY25-27.
Key takeaways from the conference call
? FY26 SA production guidance: 19.93mmt/20.11mmtoe for oil/gas. FY27 SA production guidance: 21mmt/21.487mmtoe for oil/gas
? Current NW gas is ~2.6bcm (13-14%). In FY27, NW gas shall be ~4.8+bcm (24- 25%). ? KG-98/2 production (both oil and gas) should ramp up from Jan-Feb’26, and gas production should ramp up to 6-7mmscmd by FY26 end.
? ONGC BP contract: Teams are working and tangible production output should be visible from 4QFY26.
EBITDAX beats estimates; high DDA drags PAT
? In 1QFY26, ONGC’s revenue came in 5% above our est. at INR320b.
? Crude oil/gas sales were in line with our est. at 4.7mmt/3.9bcm. VAP sales stood at 616tmt (est. 633tmt).
? Reported oil realization was USD66.1/bbl, at a USD0.9/bb discount to Brent during the quarter.
? Crude oil and natural gas production was flat QoQ/YoY.
? EBITDAX also stood 12% above our est. at INR186.6b, while PAT of INR80.2b was 4% above our est.
? DDA, dry well write-offs, and survey costs stood above estimate, while other income came in below estimate, impacting profitability.
? ONGC Videsh Limited
? OVL’s oil production was marginally down YoY at 1.75mmt, while gas production was 0.7bcm (similar YoY).
? Crude oil sales stood at 1.17mmt, while gas sales came in at 0.43bcm (down YoY). ? OVL’s revenue was INR24.5b, and PBDT stood at INR4.5b.
Valuation and view
? In the past few quarters, ONGC has struggled to raise production/sales, with no meaningful production/sales growth YoY of 1Q. Further, we like the increased exploration intensity (which is key to building a robust development pipeline), though we believe it will likely be accompanied by higher dry well write-offs, which will weigh on earnings. Also, the benefits of increased new well gas proportion for ONGC will be mostly offset by subdued gas realization amid a weaker crude oil price outlook.
? Given continued weak volume growth, we cut our FY26/FY27 SA EPS estimates for ONGC by 6%/11%. On our revised estimates, ONGC will report SA PAT CAGR of -8% over FY25-27. Given a sluggish earnings outlook, we cut FY27 PE multiple to 6x. Owing to the above factors, we downgrade ONGC to Neutral. We arrive at our SoTP-based TP of INR230 as we model a CAGR of 2%/4% in oil/gas production volume growth over FY25-27.
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