ONGC rating: Reduce – Lower other costs behind Ebitda beat

Emissions rise from chimneys at the Oil and Natural Gas Corporation Ltd. (ONGC) Uran plant in Uran, Maharashtra, India, on Monday, May 27, 2019. (File Image: Bloomberg)

ONGC’s reported Q1 standalone revenue of Rs 130 bn (-51% y-o-y, -39% q-o-q) came in 7% below our/Bloomberg consensus’ estimates, driven by 4% lower oil sales volumes and 6% lower oil sales realisation. However, standalone Ebitda at Rs 59 bn (-61% y-o-y, -31% q-o-q) was 16% above consensus and 63% above our estimate, driven by lower other expenses (-51% q-o-q, -16% y-o-y) owing to lesser provisioning. Q1 standalone PAT of Rs 5 bn (vs our/consensus’ estimates of a loss) was down 92% y-o-y driven by a sharp decline in crude oil prices as well as lower production due to COVID-19 lockdowns.

Oil volumes below our estimates; COVID-19 impacted gas demand

Oil production at 5.7mmt (-4% y-o-y, -3% q-o-q) and sales at 5.2mmt (-3% y-o-y, -5% q-o-q) were 1%/4% below our estimates, respectively. Gas production at 5.6bcm (-14% y-o-y, -8% q-o-q) and sales at 4.2bcm (-15% y-o-y, -9% q-q) were in line with our estimates. Value-added product sales at 0.66mmt declined a sharp 29% y-o-y.

We note that while oil production/sales were relatively resilient, gas production/ sales decline was steeper due to demand destruction from COVID-19 lockdowns. However, with lockdown relaxations, gas demand has improved and production has been restored to pre-lockdown levels. The impact on oil production was not material; however, due to supply chain disruptions, timelines for key projects like KG gas block have been pushed back.

Q1 realisation weaker than our estimate Oil realisation (net of VAT/CST) at $29/bbl (vs Brent at $31.6/bbl, OINL: $30.4/bbl) was 6% below our estimate. However, oil prices have recovered to $45/bbl levels so far in Q2FY21F. Gas realisation at $2.4/mmbtu was down 28% q-o-q due to a sharp 26% cut in domestic gas prices from 1 April 2020. We note that domestic gas prices are likely to fall further to ~$1.9-2/mmbtu from 1 October 2020.

OVL continued to be in losses

OVL’s oil production at 2.2mmt fell 5% q-o-q and 10% y-o-y, while gas production at 1.2bcm declined 6% q-o-q and 10% y-o-y. OVL reported a Q1 loss of Rs 3 bn due to lower production and subdued oil/gas prices.

Valuation

We use a SOTP valuation methodology to derive our TP for ONGC. We value ONGC’s standalone domestic business at 0.33x FY22F adjusted price/book. We value its overseas E&P subsidiary, ONGC Videsh Ltd (OVL, unlisted), at 6x FY22F P/E. We value its stake in listed investments at the current market price less a 20% holding company discount to arrive at our TP of `65, implying 18% downside. The stock currently trades at 0.44x FY22F adjusted P/B (adjusted FY22 BVPS of Rs 126).