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ONGC Rating: hold; High oil realisation seen in Q1 likely to decline

16 Aug , 2022   By : Monika Singh

ONGC Rating: hold; High oil realisation seen in Q1 likely to decline

ONGC’s standalone EBITDAX shot up ~2x y-o-y/40% q-o-q to Rs 259 bn (slightly ahead of consensus) on the back of higher oil realisation (up 66% y-o-y/14% q-o-q), coupled with modest volumes (up 2% y-o-y/q-o-q).

Oil realisation is likely to taper down amid falling crude prices on recession fears. Besides, imposition of windfall tax ($31/bbl) on oil production will be a drag on earnings. Meanwhile, gas realisation shall stay strong in the near-term (48% hike likely in APM gas price in Oct-22).

However, we anticipate GoI to levy some windfall tax on gas realisation. Oil/gas production will stay strong with a ramp-up of KG- 98/2 block (FY24E guidance: 60mmtoe). KG-98/2 basin to add 3mms cmd gas volume in FY24E. Retain ‘Hold’ at TP of Rs 148 (unchanged).

Strong realisation jacks up EBITDAX

ONGC reported standalone EBITDAX of Rs 259 bn on higher oil & gas realisation. Its average oil realisation surged 66% y-o-y to $109/bbl ( 14% q-o-q) on rising global crude prices. We expect near-term oil prices to remain subdued amid recession fears [(brent has fallen to $97/bbl now ($124: June)], fuelled further by OPEC’s meagre output hike of 0.1mmbpd (for Sep-22). ONGC’s gas realisation surged 3x y-o-y to ~$7/mmbtu (up 2x q-o-q) on a sharp hike in APM gas prices ( 3.4x y-o-y). We expect gas realisation to stay high (anticipate ~48% hike in APM prices in Oct-22 ($9/mmbtu). However, potential windfall tax (media reports) on gas realisation shall likely weigh on ONGC’s earnings in the near-term.

Modest production; KG-98/2 gas production to rise in FY23E

Oil production grew 2% y-o-y/q-o-q to 5.5MMT in Q1FY23. Gas production grew marginally by 1% y-o-y/q-o-q to 5.4bcm. OVL’s (100% subsidiary) adjusted PAT slid 12% y-o-y on 25%/6% y-o-y dip in oil/gas production. Refinery subsidiary MRPL reported PAT of Rs 27 bn (Rs 2 bn y-o-y) on runaway GRMs of $24/bbl (up 5x y-o-y). We expect gas production to shoot up once KG-98/2 basin becomes operational (to add ~3mmscmd volumes by FY23). GoI has asked ONGC to divest 60% stake in two major oil & gas fields (source: media article), which should be value-accretive.

Outlook and valuation: Cyclical play; retain ‘HOLD’

We had earlier downgraded ONGC to ‘HOLD’ on windfall tax levy ($31/bbl) on oil production. This will be a drag on earnings in the near-term. Moreover, we pitch ONGC as a cyclical play. Even as realisation stays strong, it continues to disappoint on production. Retain ‘HOLD/SN’ at TP of Rs 148.

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