ONGC reported better-than-expected operational Q1FY19 performance with 6% EbitdaX (up 50% y-o-y) beat on strong oil realisation. Key highlights: (i) sluggish 3% gas production growth and 4% dip in oil production given lower activity levels. Management, however, is confident that project ramp-up in H2 will meet its growth target; (ii) $74.2\/bbl net realisation was 10% ahead. Management is confident that subsidy burden is unlikely at current oil price; and (iii) strong cash flow helped drive down standalone debt by `80 bn as of July end. We expect ONGC\u2019s `800 bn projects under implementation to significantly revive gas production (FY18-22e CAGR of 7%). Maintain Buy with DCF-based target price of Rs 206. Strong realisation, lower opex offset lower production While crude production from nominated blocks fell 4% y-o-y, gas production rose 3% y-o-y. Slowdown was attributable to a seasonally lower activity level. Consequently, opex normalised to `10\/boe, down 20% q-o-q. ONGC also benefitted from 40% reduction in rig costs. Realisation at Rs 74.2\/bbl came 10% ahead in the absence of subsidy. ONGC, benefitting from better cash flows, also pruned its standalone debt by `80 bn to `170 bn as of July. Management confident of nil subsidy at current oil price ONGC is confident that subsidy concerns are unlikely at the current level of oil price. We expect ONGC to clock robust gas growth as its `800 bn worth projects ramp up. In FY19, S1\/Vashista is expected to ramp up to 3.6mmscmd (peak: 5mmscmd) and Daman by 2mmsmcd (peak: 2.6mmscmd). On KG offshore, the company has deployed three rigs and drilling of six wells is underway. While operating costs are likely to rise as activity levels pick up, ONGC will benefit from lower rig service costs. Outlook and valuations: Rising gas output; maintain \u2018BUY\u2019 Reviving gas production and rising prices portend brighter prospects. However, subsidy burden at higher oil price ($80\/bbl) remains a risk (we have assumed subsidy at oil price >$60\/bbl, a 10% rise in oil boosts EPS 14%). We estimate strong 21% EPS CAGR over FY18-21. Besides, valuations are undemanding at 6.2x FY20e PER. We maintain \u2018BUY\/SO\u2019 with DCF-based target price of `206. Q1FY19 conference call: Key takeaways FY19 production guidance: Oil production of 25.93MMT (22.75 MMT nominated) and gas 25.5bcm (nominated: 24.4bcm, JV: 1.1bcm). KG-98\/2 update: Three rigs have been deployed and six wells under drilling. East Coast update \u2013 S1-Vasishta has been completed and production will ramp up further in Q2. At Daman, four rigs are under drilling, gas production to increase in H2. Ratna development: Greenfield project development to commence in CY19 end, brownfield part to commence in Q2. Q-o-Q decrease: Workover expenses lower by `4 bn on lower activity level (120 days) as well as reduction in rig costs by 40%. Benefit of lower service cost is expected to sustain. However, expenses were higher by `9 bn due to exchange variation (gain of `0.5 bn in Q1, Q4: `1.9 bn loss). `6 bn pertains to restatement of liability. Higher tax rate: Loans for HPCL acquisition not eligible for tax deduction. Hence, tax levies have been higher. Lower other income due to deployment of additional funds for acquisition. Acquisition debt has a flexible repayment schedule and management expects significant repayment in ensuing quarters. Oil production lower: Operational issues in Western offshore. Sales were lower due to lower refinery off take.