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Price fully reflective of Value Proposition

ONGC is the largest crude and natural gas company in India armed with large proven reserves. Through its fully owned subsidiary ONGC Videsh, it has presence overseas in the form of partnership ventures for oil fields. The exploration and production activity need to pick up pace to compensate for mature fields and support India’s rapidly growing energy demand. The recent KG-98/2 field commenced is expected to boost production. Given the humongous demand levels to be met, we do not foresee any reduction in consumption of crude but an increase in output through development of new wells and ongoing exploration activities. Green energy will only supplement supply rather than replace it.

Production: ONGC has many onshore/offshore fields and has drilled 461 wells in FY23. Being India’s largest producer of oil and gas, (fulfilling ~71% of total demand), it is strategically important for the country. ONGC also has presence across the value chain through its subsidiaries (refining, petrochemicals), VAP, LNG, Power and Renewables. By 2025, it targets to have 0.5m sq.km of area under active exploration. Oil production in the recent quarter was 5.3mmt and gas production stood at 5.2bcm; the production has been falling over the past few years. With KG basin production commencing, the output is expected to increase hereon. In FY23, ONGC produced 42.8mmtoe, the management has guided a growth of 1% in FY24 and 5% in FY25 respectively.

ONGC Videsh: ONGC has participating interest in as many as 32 oil and gas assets in 15 countries. It had peak production of 14.98mmtoe in FY20, which has fallen since then, and in FY23 the production was only 10.17mmtoe. Revenue, EBITDA and Adj PAT, during Q2FY24 stood at Rs 26.7bn, Rs 10.1bn and Rs 3.3bn. The management has guided FY24 volumes at 10.68mmtoe, 11.0/11.22mmtoe for FY25/26 respectively.

Realization: The net crude realization for Upstream companies is capped at ~USD 75- 77/bbl, any price rise beyond will invite windfall taxes, which will restrict their realization. Windfall taxes are calculated on ~15 days price change. The gross crude oil realization in the recent quarter stood QoQ lower at USD 74.6/bbl (Q1: USD 76.5/bbl). The effective natural gas realization for FY24 is at USD 6.5/mmbtu and would be USD 7.0/mmbtu for FY25.

Dividends: Dividend payout ratio has averaged at 40% for the last 4-years. Dividend yield for last 4-years have been ~6% and we estimate 5.7/5.4/5.2% for FY24e/25e/26e. ONGC dividend for FY22/FY23 were Rs 10.5/11.25 per share.

Green initiatives: ONCG intends to spend Rs 1,000bn by 2030 for expanding its renewable and low carbon sector. It plans to set up renewable portfolio of 10GW by 2030. Collaborations are being explored in renewables, green hydrogen and its derivatives and green ammonia. Natural gas will play key role in balancing renewable energy and reducing carbon emissions.

Outlook: We initiate a Neutral rating on ONGC, and a TP of Rs 225/sh, as we find the stock trading at fair valuations. Our TP of Rs 225/sh comprises of a) Rs 172/sh for the stand-alone domestic business, valued on 6.0x PER FY26e (ex-dividends), b) Rs 6.3/sh for OVL on PER of 6.0x FY26e, c) Rs 47/sh for investment in listed equities, valued at 30% hold-co discount to market price.

Risks: Weaker crude and gas prices, delay in production from newer fields, higher decline in volumes from legacy fields, hasty overseas acquisitions/investments, changes in government policies.

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