PL Stock Report: Oil & Natural Gas Corporation (ONGC IN) - Q1FY24 Result Update - Volume growth to be key monitorable - BUY

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

Rating: BUY | CMP: Rs177 | TP: Rs218

Q1FY24 Result Update - Volume growth to be key monitorable

Quick Pointers:

♦ Oil and gas production down 3% YoY

♦ Gas realization declined 22% QoQ to US$6.7/mmbtu post revision in prices

ONGC’s result were below estimates with EBITDA/PAT of Rs 194.5 bn (+19% Q/Q, PLe: Rs 206.4 bn) and Rs 100.2 bn (vs Net loss of Rs 2.5 bn in Q4FY23, PLe: Rs 107.9 bn) respectively on a standalone basis. Oil production increased marginally 1% QoQ while gas production fell by 1% QoQ. Production volume is expected to increase with commencement of production from KG Basin and we have estimated a 5.4% CAGR and 9% CAGR in oil and gas production, respectively over FY23-FY25. The stock is currently trading at 44.3x FY25 EPS and 2.4x Fy25 EV/EBITDA. We maintain our ‘Buy’ rating with a TP of Rs 218, valuing the standalone business at 6x FY25 adj EPS of Rs 30.5 and add the value of investments of Rs 35.

Operating performance improves QoQ: ONGC’s standalone revenue came in at Rs 338.1 bn (down 6.8% QoQ) due to decline in gross oil and gas realization. However, operating profit grew 19% QoQ to Rs 194.5 bn primarily due to a 45% decline in other expenses. There was a sharp 82% QoQ decline in exploratory well costs to Rs 4.9 Bn. PAT came in at Rs 100.2 bn against a net loss of Rs 2.5 bn in Q4.

Net realization declines QoQ: ONGC’s oil production stood at 5.31 MMT, marginally up 1% QoQ. However, gas production at 5.22 BCM was down 1% QoQ. Total oil and gas production was down 3% YoY. The company stated that the decline was due to shutdown in Panna-Mukta offshore platforms, disruption caused by the cyclone in June and offtake issues in southern India. ONGC Videsh’s (OVL) oil production came in at 1.8 MMT, up 6.6% QoQ while gas production at 0.83 BCM was down 14% QoQ. ONGC’s crude oil sales for the quarter at 4.72 MMT was up 1% QoQ while gas sales at 4.08 BCM were down 1% QoQ. Net oil realization post accounting for windfall tax at US$76.5/bbl was marginally down by US$0.6/bbl, while gas realization at US$6.7/mmbtu fell 22% QoQ due to revision in domestic prices.

Company Outlook: Although crude prices have risen to ~US$86/bbl, we believe the company’s net oil realization is likely to be at around US$70/bbl post windfall tax. Domestic gas prices have been revised from US$8.6/mmbtu to a ceiling of US$6.5/mmbtu for the next two years, with production from new wells attracting a premium pricing of 20%. On the production front, the company expects volumes to rise especially with the commencement of oil production from KG 98/2 in Q3FY24. We build in a 5.4% increase in oil production and 9% increase in gas production. Estimated oil production in FY25 is 23.9 MMT while gas production is 25.4 BCM.

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