ONGC rating ‘Buy’: Oil production remains a concern

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Published: February 23, 2019 12:20:52 AM

Performance in Q3 was strong; while gas volumes will grow, FY19/20/21e EPS cut to reflect lower oil output; ‘Buy’ maintained

ONGC Rating: buy: Oil production remains a concernONGC Rating: buy: Oil production remains a concern

Net operating income in Q3 increased to Rs 277 bn, as against our estimate of Rs 268 bn (+20% y-o-y, -1% q-o-q). Lower expenditure on account of forex gains resulted in higher Ebitda of Rs 166 bn, as against our estimate of Rs 150 bn (+32% y-o-y, +5% q-o-q). Despite higher-than-expected Ebitda, higher depreciation (including write-offs) dented PAT, which stood at `82.6 bn as against our estimate of `80.7 bn (+65% y-o-y, flat q-o-q). Depreciation including write-offs came in at `61.5 bn (+5% y-o-y, +27% q-o-q), due to more-than-double cost (y-o-y and q-o-q) of exploration well write-offs at `23.9 bn.

Oil realisation
ONGC’s crude oil realisation stood at $66.4/bbl v/s $60.6/bbl in Q3FY18 and at $73.1/bbl in Q2FY19. There was no subsidy burden in the quarter.

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Sales volumes
Oil sold stood at 5.4mmt (-9% y-o-y, flat q-o-q). Gas sold stood at 5.3bcm (+6% y-o-y, +5% q-o-q), with increased production from Daman, Mumbai and Eastern offshore. Total VAP sold stood at 920 tmt (+1% y-o-y and q-o-q).

Valuation and view
We have revised crude oil production lower by 1.2mmt (inc. JVs) for FY20/21e, to factor in expected delays in project executions. Gas production is expected to grow 5-6% in FY20/21e. Our assumption is conservative compared to the guidance of the company. 9MFY19 standalone Ebitda/PAT stands at `471/227 bn, up +43% y-o-y/+62% y-o-y. We estimate FY19 standalone EPS of `22.9 and consolidated EPS of `26.9, down from `29.6 to reflect adjustment in costs as well as production. We also cut FY20 and FY21 consolidated EPS estimates by 10% to reflect lower estimate of production. The stock is trading at 4.4x FY20e consolidated EPS of `30.3. We value the standalone segment at 8.0x Dec’20 EPS (adjusted for other income) of `19.2 and add value of investments to arrive at a target price of `182/share. Reiterate Buy.

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