ONGC’s Q2FY20 standalone earnings rose 6% q-o-q to Rs 6,300 crore, missing JEFe by 13% on higher taxes, forex losses and DD&A. Ebitda was 3% lighter too, though, on lower product sales but we are more disappointed by the soft consolidated earnings that were 16% lower than standalone. The downstream ventures (HPCL, MRPL, OPAL, OMPL) were expectedly weak but so was OVL. We cut FY20-22E EPS by 8-12%, largely driven by arms & JVs, but keep our ‘buy’ noting ~7.5x P/E & ~5.5% yield. ONGC’s standalone Q2FY20 net inline with consensus but 13% lower than JEFe despite higher other income. Higher tax rates (37% excluding dividend) hurt as did higher dry-well writeoffs (Rs 1,420 crore), a Rs 450 crore impairment and Rs 400 crore in forex losses with the AS-116 impact also wider at Rs 200 crore.

Yet, Ebitda (Rs 13,300 crore) was also 3% lighter falling 9% q-o-q despite lower than estimated operating expenses (flat y-o-y, $9.3/boe) driven largely lower LPG and C2/C3 volumes with oil & gas revenue inline. Indeed, the gap between oil sales and production narrowed to 5.4% with gas sales a tad better too as were oil realisations for its own assets.

Production performance, although preannounced, remains tepid, however, with domestic gas production now 10% off the late 2018 peaks and oil production languishing near 30-year lows. Indeed, production at OVL fell 2.4% q-o-q too also leaving consolidated output 2.4% q-o-q lower at 1.16mboepd and 5% off peaks.

Indeed, production is unlikely to rebound soon, ONGC’s optimism notwithstanding, but we were more disappointed by the weak consolidated earnings, which came 16% below standalone. While wider losses at MRPL, OMPL & OPAL and HPCL’s soft quarter were well known, OVL did poorly too with net profits falling 76% q-o-q to Rs 300 crore hurt by soft Vankor production, higher taxes and likely forex losses. We reflect this forecasts cutting FY20-22E EPS by 8-12%, primarily driven by weaker outlook for the downstream ventures and lower OVL earnings, with our standalone EPS, which still factor in $60 in net oil realisations as also a ~25% fall in APM gas prices in FY21E on softer NA & Europe prices, just 2-3% lower than before. In turn, this leaves consolidated earnings at ~Rs 17/sh in FY20-22E EPS presuming ONGC stays under the old tax regime like it did this quarter. With its adjusted cash tax rate at 30.4% in H1FY20, though, it may well transition to the new regime, perhaps with a lag as it runs down its credits, likely lifting earnings by ~10%.