Analyst Corner – ONGC: Maintain ‘buy’, capex guidance for FY22 at Rs 295bn

Despite the continued delay, ONGC’s gas production is likely to clock a CAGR of 7% over FY21–24E, with efforts to arrest the decline in oil production.

Concerns over delay in gas production continue: ONGC reported in-line numbers and crude oil sales; lower gas sales were offset by higher-than-estimated VAP sales. Gas offtake was lower due to lower offtake from GAIL, led by shutdowns at the customer end. Gas production continues to decline on a sequential basis. The management has guided for gas production potentially at 24.7bcm for FY22, while gas production would be lower than earlier guided at 27bcm for FY23. Delays in production at the KG-DWN-98/2 field continue amid restrictions on international movement due to Covid. The guidance is that gas production from the field may be ramped up to 3mmscmd by Dec’21, with a further ramp-up expected by Jun’22. The peak production is expected at 14.5mmscmd/45kbopd for gas and oil, respectively. In line with the aforementioned delays, we shift our production estimates of 24mmt/27.8bcm to FY24E and lower our FY23E estimates to 23.2mmt/25.8bcm. ONGC expects 2HFY22 APM price to rise above $2.8/mmbtu (from $1.79 currently), with APM price significantly expected to increase in 1HFY23 as well. Brent prices have started cooling off from the peak of $75/bbl in Jul’21 to ~$70/bbl. We expect prices to return to normal levels of $60–65/bbl as OPEC+ gradually increases its oil production (by 0.4mnbopd per month from Aug’21). We forecast Brent price of $63/$60 per bbl for FY22E/FY23E, considering the easing of the current 5.8mnbopd production cuts. Despite the continued delay, ONGC’s gas production is likely to clock a CAGR of 7% over FY21–24E, with efforts to arrest the decline in oil production.

Result in line with estimates: Crude oil sales were in-line at 5.1mmt (-1% YoY and -3% QoQ). Although, gas sales were lower at 4.1bcm (-8% est.; -3% YoY and -7% QoQ). On the other hand, VAP sales were better than expected at 784tmt (+13% est.; +15% YoY and +8% QoQ). Net realisation was in line with estimates at $65.6/bbl (+128% YoY and +13% QoQ). Thus, revenue was in-line at Rs 230b (+77% YoY and +9% QoQ). Ebitda stood at Rs 121.5b (+106% YoY and +20% QoQ). Higher interest cost was offset by higher other income, while depreciation was lower. Reported PAT stood at Rs 43.3billion (v/s Rs 5billion/Rs 67billion in 1Q/4QFY21). OVL PAT stood at Rs 9.2billion (v/s loss of Rs 3.3billion in 1QFY21 and gains of Rs 10.2billion in 4QFY21).

Valuation and view – maintain buy: Capex guidance for FY22 stands at Rs 295billion (v/s Rs 280billion spent in FY21). OPAL reported profits for the second consecutive quarter, with utilisation at 87% in 1QFY22. Ebitda stood at Rs 9.7billion in 1QFY22 (v/s Rs 11billion in 4QFY21), with PAT at Rs 0.65billion (v/s Rs 0.27billion in 4QFY21). ONGC is further improving process efficiencies to maintain profitability.