While outlook for oil production is muted, KG-98/2 will boost gas output; valuations inexpensive; ‘Buy’ retained
ONGC reported Q4FY20 EBITDAX of Rs 36.9 bn (down 70.2% y-o-y, 70% q-o-q), missing our estimate by 63%. Key takeways: (i) The miss is primarily due to a one-time impairment loss worth Rs 48.9 bn towards crude oil/gas inventory. Adding back the impairment cost, ONGC’s profit dipped by 55.5% y-o-y to Rs 18.0 bn. Impairment is now a global phenomenon with majors Shell and BP Plc too planning to take hit thereof; (ii) ONGC’s oil sales volumes declined by 7.3% y-o-y and gas by 10.3% y-o-y as COVID-19 struck in the end of March; (iii) realisations are broadly in line, sliding by 20% y-o-y in case of oil to $49/bbl and 9.9% y-o-y in case of gas to $3.55/ mmbtu.
The KG-98/2 basin production start is delayed due to COVID-19; it shall now be ramped up by Dec-21, which shall drive up gas production by 15%. We expect ONGC’s Rs 800-bn worth of projects under implementation to revive gas production from FY20–23e with an Ebitda CAGR of 13%. However, we remain cautious on FY21 demand outlook bearing in mind the COVID-19 crisis and the Saudi-Russia uncertainty on crude production cuts. All in all, we are cutting FY21E oil production forecast by 8.7%. Retain Buy with a revised TP of Rs 100/share ( Rs 103 earlier) given its attractive 4.9x FY22e PER.
Production remains subdued; muted outlook for oil: Oil production (-1.4% y-o-y) continued to decline and underperform management’s guidance. More worryingly, gas production has started declining (down 7.9% y-o-y, 2.2% q-o-q), reversing several quarters of steady production. We now expect oil production to remain flat over FY20–23 while gas production will rise due to KG-98/2, though it remained muted in 1HFY21 due to the COVID-19 impact. Besides, gas profitability would improve as KG gas is eligible for deepwater pricing.
Operating performance: Stable, but challenges in near term — ONGC incurred capex of Rs 300 bn in FY20, and has given FY21 revenue guidance of Rs 320 bn. Its net debt/equity remains at 0.4x (FY20) with healthy FCF of Rs 171 bn.
Outlook: Inexpensive: Start of large KG-98/2 production in FY21e, which is eligible for deep-water pricing, shall boost gas revenue. Valuations are compelling at 4.9x FY22e PER. Maintain ‘BUY/SO’.