ONGC Rating: Buy; Higher costs impacted Q1 numbers

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Updated: August 20, 2019 1:11:23 AM

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.

ONGC Rating, ONGC Q1, ONGC share, ONGC news, ONGC videshWith realisations more crucial than volumes, earnings momentum could wane here in the rest of FY20 as it could for the domestic assets.

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).

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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).

 

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