ONGC Rating: Buy; Higher costs impacted Q1 numbers

ONGC’s Q1FY20 standalone earnings fell 4% y-o-y to Rs 59 bn missing JEFe by 20% on higher exploration costs. Ebitda was also 7% lighter on lower sales volumes and higher opex but OVL did better leaving consolidated EPS 13% higher than standalone despite losses at MRPL. Earnings momentum may soften in 2HFY20 as realisations fall but with valuations undemanding at 6.4x FY20e P/E, we keep our Buy with a slightly lower Rs 180 PT as we also trim FY20-21e EPS by 2-4%.

Q1FY20: ONGC’s standalone Q1FY20 net fell 4% y-o-y (+46% q-o-q) to Rs 59.04 bn. Lower other income and higher interest, survey expenses (Rs 8.8 bn) & dry-well write-offs (Rs 14.5 bn) were reasons but Ebitda (Rs 146 bn) was also 7% lighter falling 7% y-o-y.

Core: Production from ONGC’s own assets was in line (and tepid) but JV output was lower (esp. at RJ) with sales volumes also short of JEFe. Oil sales were 8% lower than production, e.g., with the gap between gas sales and production also wider q-o-q (and over time).

Opex: With in-line realisations ($69 for oil), this left revenues 4% lower than JEFe with higher opex (+17% y-o-y) also a drag. Debt has pulled back by ~Rs 100 bn since March with capex light at Rs 51 bn in Q1.

Consolidated: Indeed, we are also encouraged by the 86% y-o-y rise in earnings at ONGC Videsh (OVL) that left consolidated EPS 13% higher than standalone despite losses at MRPL, a soft quarter at HPCL and weak performance at OPAL & OMPL (softer PE/PX).

Read| Sensex falls 315 points from day’s high as financials, auto stocks plunge, Nifty above 11,000

Production: Much of the strength at OVL came from higher realisations and lower costs, though. Indeed, production trends were soft with oil (Vankor, Sakhalin) and gas (Sakhalin) output down ~3.5% q-o-q, cutting ONGC’s consolidated production by 2.7% q-o-q.

Outlook: With realisations more crucial than volumes, earnings momentum could wane here in the rest of FY20 as it could for the domestic assets. We recently reset our 2H19-2020 Brent forecasts down to $58-60, e.g., and also expect domestic gas prices to fall 10% in 2HFY20 weighed down by lower Europe prices.

Estimates: We had cut EPS by 8-10% earlier in July, therefore, and trim FY20-21e EPS by another 2-4% to factor in the Q1FY20 results, higher opex and exploration costs, weaker performance at MRPL and its petrochem JVs and AS-116 at PLNG. Even so, consolidated earnings may only fall 14% in FY20e to Rs 20.5/share from the all-time high of FY19 when it rose 38% y-o-y. In turn, this leaves valuations modest at 6.4x FY20e P/E with a +6% yield too. Lower Brent is the key risk ($1 = ~2.5% for EPS).