PL Stock Report - Oil & Natural Gas Corporation (ONGC IN) - Q2FY24 Result Update - Ramp up in production to be key monitorable - BUY

Oil & Natural Gas Corporation (ONGC IN) – Swarnendu Bhushan – Co-Head of Research, Prabhudas Lilladher Pvt Ltd

Rating: BUY | CMP: Rs196 | TP: Rs237

Q2FY24 Result Update – Ramp up in production to be key monitorable

Quick Pointers:

§ Net oil realization post windfall tax came in at US$73/bbl while gas realization stood at US$6.5/mmBtu.

§ Oil and gas production fell 2% and 3% YoY, respectively.

Oil and Natural Gas Corporation’s (ONGC) result was below estimates with EBITDA/PAT of Rs 183.6 bn (-6% Q/Q, PLe: Rs 199 bn) and Rs 102.2 bn (+2%Q/Q, PLe: Rs 107.4 bn) respectively on a standalone basis. On a QoQ basis, oil and gas production fell 1% and 0.6%, respectively. Total volume is expected to increase with commencement of rest of production from KG Basin and we have estimated a 4% CAGR and 6% CAGR in oil and gas production, respectively over FY23-FY26E. The stock is currently trading at 4.7x FY25 P/E and 2.7x FY25 EV/EBITDA. We maintain our ‘Buy’ rating with a TP of Rs 237, valuing the standalone business at 7x FY26 adj EPS of Rs 28.2 and add the value of investments of Rs 39.

Operating performance declines QoQ: EBITDA at RS183.6bn was down 6% QoQ. PAT came in at Rs 102.2bn, up 2% QoQ aided by higher other income of Rs20.9bn (up 29% QoQ). EBITDA/PAT were down 2%/20% YoY. For H1FY24, EBITDA came in at Rs 378bn, down 15.5% YoY and PAT at Rs 202bn was down 27.8% YoY.

Production declines QoQ and YoY: ONGC’s oil production stood at 5.2 mmt, down 1% QoQ. Gas production too fell 0.6% QoQ to 5.2 bcm. Total oil and gas production was down 2% and 3% YoY. The decline in production was due to decline in matured fields, shutdown in Panna-Mukta field, disruption caused by Cyclone Biparjoy in June and offtake issues in southern India. Value added products (VAP) production at 0.6 mmt was up 4% QoQ, while sales grew 7.6% QoQ. ONGC Videsh’s (OVL) oil production came in at 1.7 mmt, down 2.1% QoQ while gas production at 0.81 bcm fell 3% QoQ. ONGC’s crude oil sales for the quarter at 4.7 mmt were down 1% QoQ and 2% YoY. Similarly, gas sales at 4 bcm was down 1% QoQ and 3% YoY.

Company Outlook: On the realization front, net oil realization post windfall tax is likely to be maintained at ~US$70-75/bbl while gas prices have been capped at US$6.5/mmBtu. This provides comfort on the realization front. On the production front, decline in oil and gas production is likely to be compensated post commissioning of production from the KG Basin in the coming quarters. We build in a volume CAGR of 4% and 6% for oil and gas over FY23-26E to reach 23.9 mmt of oil and 25.4bcm of gas in FY26E.

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