ONGC: Gas output may clock 6% CAGR over FY20-23

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Updated: Feb 17, 2021 9:06 AM

Crude oil production has reached last year's levels, while gas is still marginally lower YoY due to lower offtake by customers on account of Covid-19.

ONGCThe company continues to operate under the old tax regime - a decision on the same is expected by next year.

ONGC reported in-line sales volumes, with realisation at $43.2/bbl. Crude oil production has reached last year’s levels, while gas is still marginally lower YoY due to lower offtake by customers on account of Covid-19. For FY21/FY22, the company has guided for oil production at ~22.5mmt/23mmt (flat YoY), while gas production is set to increase to ~23bcm/25bcm (+8% YoY), although lower than earlier estimates. Covid has caused further delay in KG-DWN-98/2, with the peak production target to be achieved over 2023-24.

Production is likely to rise to 2.5- 3mmscmd by May’21 (which currently produces ~0.3mmscmd), reaching ~3.5mmscmd/8.5mmscmd in FY22/FY23. Our oil production assumption remains unchanged, while we lower our gas assumptions to ~25bcm/28bcm for FY22/FY23 (from ~27bcm/31bcm). We believe oil prices would not sustain above $60/bbl in the near term as OPEC+ production quotas are normalised (from -8.2mnbopd). IEA, in its Feb’21 OMR, expects 1QCY21 oil demand to fall ~1mnbopd from 4QCY20. We further expect APM price revision of 25-30% from 1st Apr’21 on current gas price of $1.79/mmbtu.

For ONGC, cash flow breakeven stands at $50-55/bbl for oil and $3- 3.5/mmbtu for gas. Although variable cost of production is low, the domestic gas price ceiling would not affect production at the KG Basin. Despite the continued delay, ONGC’s gas production is likely to clock a CAGR of 6% over FY20-23, with efforts undertaken to arrest decline in oil production from age-old fields (accounting for 60-70% of the total oil production). Maintain ‘buy’.

Oil/gas sales were in line with our estimates at 5.3mmt/4.5bcm (+1%/-6% YoY). VAP sales stood at 784tmt (8% below our estimate; -12% YoY). Oil/gas production stood at 5.6mmt/5.8bcm (-3%/-6% YoY). Oil price realisation was in-line at $43.2/bbl. Revenue came in at `170.2b (-28% YoY). Ebitda posted a marginal beat of 6% to `83.5billion (-m32% YoY). The opex reduction was offset by an increase in work-over-field expenses. Interest cost was lower (24% YoY) as ONGC converted short-term loans to long-term lower interest loans. A settlement of `5.1billion under the Vivad se Vishwas scheme was charged in 3QFY21.

The company continues to operate under the old tax regime – a decision on the same is expected by next year. PAT stood at INR13.8b (-67% YoY). For 9MFY21, revenue fell 37% YoY to INR470b, weighed by oil price realization of USD37.8/bbl (-39% YoY). EBITDA / Adjusted PAT stood at INR227b/INR56b (-44%/-66% YoY). Oil/Gas sales fell 3%/10% YoY to 15.5mmt/13.3bcm. VAP sales declined 15% YoY to 2,300tmt.

The capex plan for FY21 stands at ~INR290b, and the company remains confident of achieving its target for the year. Capex guidance for FY22 would once again normalize to the historical average of INR320b. Standalone debt was INR128.6b at the end of Dec’20 (down from INR139.5b at the end of FY20). The board has approved an interim dividend of INR1.75/share. In FY20, ONGC made a total of 12 discoveries (seven onshore, five offshore) and has notified of eight new discoveries (five pools and three prospects) in FY21 thus far. ONGC is trading at 3.4x FY23 EV/EBITDA and 4.8x FY23 PE. We value the company at 10x Sep’22E adj. EPS of INR8.2 and add the value of investments to arrive at Target Price of INR115. Reiterate Buy.

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