ONGC Rating ‘Sell’: Operating numbers in line with estimates

Raise FY2022-23E EPS factoring in higher oil and gas prices

ONGC’s operating performance was broadly in with our expectations amid a sustained decline in volumes from own fields. We expect the earnings trajectory to improve meaningfully in FY2022-23 driven by elevated oil prices and expected sharp increase in gas price. However, we retain our Sell rating on the stock noting (i) muted production profile despite large capex, (ii) generally rising cost structure and (iii) deteriorating return ratios amid inefficient capital allocation. Further rise in oil and gas prices is a key risk to our negative stance on the upstream PSUs.

In-line operating performance
ONGC’s revenue was marginally above our estimate at Rs 211.9 bn as modestly lower oil sales volumes and realisation was offset by higher VAP realisations. Ebitda was 2.6% higher than our estimate at Rs 101.2 bn, benefitting from lower operating expenses. Adjusted standalone net income was well above our estimate at Rs 47.6 bn (EPS of Rs 3.8) boosted by a sharp jump in other income, lower DD&A and lower tax rate at 24.6%. Consolidated net income was higher at Rs 94 bn (EPS of Rs 7.5). In FY2021, adjusted standalone net income declined 38% y-o-y to Rs 103 bn (EPS of Rs 8.2), reflecting sharp drop in oil and gas realisations and lower production volumes. Consolidated net income was higher at Rs 207 bn (EPS of Rs 16.5).

Weakness in volume trajectory continues in Q4FY21
In Q4FY21, crude oil sales volumes declined 4% y-o-y to 5.22 mn tons reflecting 5% reduction in production from own fields. Gas sales volumes declined 6% y-o-y to 4.39 bcm reflecting 9% lower production from own fields, which was offset by 21% rise in JV production. VAP sales volumes declined by 16% y-o-y and 7% q-o-q to 0.73 mn tons. OVL’s production remained weak declining 13% for crude oil to 2.03 mn tons and 12% for gas to 1.12 bcm.
Raise FY2022-23E EPS factoring in higher oil and gas prices

We raise FY2022-23e consolidated EPS to Rs 21.5 and Rs 19.7 respectively from Rs 14.7 and Rs 15.3 factoring in (i) higher oil price of $65/bbl and $60/bbl and gas price of $2.7/mn BTU and $4/mn BTU and (ii) other minor changes. We revise our FV to Rs 110 (Rs 90 earlier), based on 6X standalone EPS plus the value of investments. We recommend avoiding upstream PSUs given (i) uninspiring production track record despite a sustained rise in capex and operating costs and (ii) limited FCF generation and deteriorating returns profile.