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Production volume growth disappoints

* ONGC’s 4QFY26 standalone revenue came in line with our est. at INR359b. Crude oil/gas sales were 4%/5% below our est. at 4.6mmt/3.8bcm. Reported oil realization was USD78.3/bbl. Crude oil production declined 3%/6% QoQ/YoY, and natural gas production declined 4%/3% QoQ/YoY. Weakness in oil production was attributed to

1) geological complexities at the 98/2 field in the Eastern offshore

2) operational issues at the DUDP project. SA EBITDAX came in 7% below our est. at INR178b. Other expenses were above our est. Exchange loss stood at INR11.8b in 4QFY26. SA APAT stood 11% below our est. at INR67b.

* Key things we liked about the result:

1) ONGC has extended the technical service provider contract to cover the entire Western Offshore after a promising outcome in the Mumbai High field.

2) OPaL’s performance improved as it reported a loss of INR0.7b in 4QFY26 (vs. a loss of INR5.4b/ INR13.3b in 3QFY26/4QFY25). OPAL faced some temporary operational issues in Mar’26, including gas diversion towards LPG, affecting production and earnings. Management remains confident of a turnaround as overseas assets stabilize and new projects ramp up.

3) New well gas contribution continues to ramp up, with production already above 9mmscmd from Apr’26 and another ~3mmscmd expected via Daman Upside. NW gas now contributes ~25% of ONGC’s gas output (vs. 17% earlier) and is expected to rise to ~30% in FY27 and ~34-36% by FY28.

4) Under “Project DeepX” and the “Samudra Manthan” initiative, ONGC plans to double deepwater drilling activity over the next two years, intensifying focus on frontier exploration.

* Key investor concerns:

1) Crude oil production declined 3%/6% QoQ/YoY, while natural gas production fell 4%/3% QoQ/YoY, largely due to geological complexities at the 98/2 field in the Eastern offshore and operational issues at the DUDP project.

2) Due to reservoir complexities, KG 98/2 is currently producing ~24kb/d of oil and 2.3mmscmd of gas, with management expecting production to recover to earlier levels of 25- 30kb/d oil and 3-4mmscmd gas over the next year. ONGC could see soft production volumes in 1HFY27.

* Valuation : We reiterate our Neutral rating on the stock and arrive at our SoTP-based TP of INR265 as we model a CAGR of 2.7%/3.7% in oil/gas production volumes over FY26-28.

* Valuation and view

* In the past few quarters, ONGC has struggled to raise production/sales, with no meaningful production/sales growth YoY in FY26. 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. Further, the benefits of an increased new well gas proportion for ONGC will be mostly offset by subdued gas realization amid a weaker crude oil price outlook.

* We arrive at our SoTP-based TP of INR265 as we model a CAGR of 2.7%/3.7% in oil/gas production volume growth over FY26-28.

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