ONGC has consistently disappointed on production in the past but recent project start-ups and several more that are on the anvil should lift output materially — especially for gas where ONGC targets to double volumes in 5-6 years. This still seems aggressive to us, but our earlier caution also appears conservative, prompting us to raise domestic gas production forecasts by 1-19%. We also lift FY19-21e EPS by 3-9% and our PT to Rs 215; retain Buy.
Our constructive view on ONGC is premised on gradually rising oil prices and its inexpensive valuations. Production matters too but the impact on EPS is modest—every 1% change in domestic oil, domestic gas and overseas output lifts EPS by 0.90/0.28 /0.18%.
Indeed, ONGC also missed its oil production targets in each of the past 12 years and in gas in the past six. Higher base decline rates and lower gains from new projects hurt but not as much as delays with its projects running three years behind schedule on average.
Such delays remain endemic but projects will still start-up at some point. It completed $9.1 bn in projects in FY15-17, e.g., with another $5.8 bn due in FY18-20E. Some of these will slip but the ramp-up of completed projects and new start-ups should still help. Oil production, e.g., rose 2.5% y-o-y in 1HFY18 after a decade of disappointments.
Gas production has risen at a faster 10% over FY16-1HFY18. Indeed, our bottom-up production wedge that builds in further six month delays, a subsequent six-month ramp-up to peak and 7% base decline suggests that our FY19-21E forecasts may be conservative.
The Vashistha/S1, Daman, Bassein, WO16, C26, B127 projects are key totaling 28 mmscmd of incremental peak output (or 45% of current). KG-98/2 may add another 16 mmscmd (and 77 kbpd oil) but we expect it to start-up in FY22E; ONGC projects FY20.
The ~5mmscmd deep-water Vashistha/S1 project, slated for completion in 4QFY18, should accrue higher gas prices (up to 120% more) helping boost the bottom-line. The KG-98/2 project should as well; we carry this at Rs 14/sh in our PT — primarily from Cluster-2.
We maintain oil output forecasts but lift FY19-21E gas output by 1-19%, still 1-4% below our bottom-up wedge; and for FY19, 13% lower than ONGC’s target. Together with higher gas prices for Vashistha/S1, we lift FY19-21E EPS by 3-9% (16.8% FY18-21E CAGR).
We raise our PT to Rs 215 using a mix of P/E, EV/Ebitda and P/CF. Risks: Lower oil prices, expensive M&A and subsidies.
Company description: ONGC is the largest oil & gas exploration and production company in India and contributes close to 80% of India’s oil & gas production. As of March 2011, ONGC had 962MMtoe of 1P reserves.