March 9, 2023
analysis123 analysis123
ONGC, Production growth to pick up in FY24E
Call & Research Report by ICICI Securities
Sector: Oil Exploration and Production
CMP Rs. 148, Target Rs. 187 (26% upside potential)
Target Period: 12 Months
ONGC has reported a strong 22% YoY improvement in standalone EBITDA and 26% YoY rise in PAT of Rs191.8bn (I-Sec estimate of EBITDA: Rs213bn and PAT of Rs122.4bn) in Q3FY23. Consolidated EBITDA and PAT of Rs222.5bn and Rs115bn were flat and grew 5% YoY, respectively. FY23 has been a strong year for earnings, with 9MFY23 EBITDA of Rs579.2bn, up 1% YoY despite the strong base of FY22 earnings (PAT of Rs324bn is down 7% YoY). Despite strong earnings, stock remains subdued due to i) concerns about production growth, ii) weak results of subsidiaries HPCL and OVL, and iii) windfall tax. However, we note even at a realisation of US$75/bbl for oil and Rs20-21/scm for gas, standalone and consolidated EPS for FY23E of Rs41.5/sh and Rs40.2/sh, respectively, are well above the historical averages. With full production of KG field available by FY25E, FY25E EPS of Rs51.6 (introduced with this note) signifies stronger earnings prospects, even with capped oil and gas realisations (due to windfall tax and Kirit Parikh Committee recommendations). We believe valuations of 3.2x FY24E consolidated EPS and 2.5x EV/EBITDA remain attractive. Reiterate BUY.
● Brent remains strong despite recent reverses: Brent crude prices have moderated to US$85/bbl levels, driven by continued concerns on demand and uncertainty on Chinese demand momentum. Q3FY23 average realisation of US$76.9/bbl (net of windfall tax of US$10.2/bbl) was up 2% YoY and 9M net average price of US$86/bbl was up 22% YoY. At our FY23E and FY24E estimates of Brent crude @ US$95/90 per barrel, we see ONGC’s net realisation remaining at ~US$75/bbl – well above the historical averages.
● Gas price surge to sustain: Average gas price realisation of Rs26.6/scm was up 2.9x YoY and 38% QoQ in Q3FY23. 9MFY23 blended gas price of Rs21.5/scm was up 2.8x YoY. While the Kirit Parikh Committee is expected to lower domestic gas prices to some extent, management believes there would be some element of marketing and pricing freedom in the new formula. Given that KG basin gas would qualify for premium pricing and that international prices would likely remain well above the historical levels, we see net gas realisation at Rs22.6/scm, Rs20.6/scm and Rs22.3/scm for FY23E, FY24E and FY25E, respectively.
● Conservative on production growth estimates: ONGC’s standalone production of oil & gas (including JV share) declined by ~6.7mtoe in the last 4 years. Also, while the start of production from KG basin asset and new assets is expected to redress this trend over FY23-FY27, we remain conservative in our estimates, factoring-in ~4% CAGR in oil and gas output (standalone) over FY22-FY25E.
● Stock down 11% in the past one year; BUY: We cut our FY23E and F24E EPS by 7% and 13%, respectively, to factor in the marginally higher opex, lower realisations and weaker subsidiary earnings. We have revised down the target price by 4% to Rs187/sh due to lower earnings assumptions. Reiterate BUY.
● Key risks: i) Sharp reversal in oil & gas price trends, ii) further delays in start of production from KG basin, and iii) regulatory setbacks.
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