ONGC’s operating functionality was broadly in with our expectations amid a sustained decline in volumes from personal fields. We anticipate the earnings trajectory to increase meaningfully in FY2022-23 driven by elevated oil costs and anticipated sharp boost in gas cost. However, we retain our Sell rating on the stock noting (i) muted production profile regardless of massive capex, (ii) normally increasing expense structure and (iii) deteriorating return ratios amid inefficient capital allocation. Further rise in oil and gas costs is a crucial threat to our unfavorable stance on the upstream PSUs.
In-line operating functionality
ONGC’s income was marginally above our estimate at Rs 211.9 bn as modestly reduce oil sales volumes and realisation was offset by larger VAP realisations. Ebitda was 2.6% larger than our estimate at Rs 101.2 bn, benefitting from reduce operating expenditures. Adjusted standalone net earnings was nicely above our estimate at Rs 47.6 bn (EPS of Rs 3.8) boosted by a sharp jump in other earnings, reduce DD&A and reduce tax price at 24.6%. Consolidated net earnings was larger at Rs 94 bn (EPS of Rs 7.5). In FY2021, adjusted standalone net earnings declined 38% y-o-y to Rs 103 bn (EPS of Rs 8.2), reflecting sharp drop in oil and gas realisations and reduce production volumes. Consolidated net earnings was larger at Rs 207 bn (EPS of Rs 16.5).
Weakness in volume trajectory continues in Q4FY21
In Q4FY21, crude oil sales volumes declined 4% y-o-y to 5.22 mn tons reflecting 5% reduction in production from personal fields. Gas sales volumes declined 6% y-o-y to 4.39 bcm reflecting 9% reduce production from personal fields, which was offset by 21% rise in JV production. VAP sales volumes declined by 16% y-o-y and 7% q-o-q to .73 mn tons. OVL’s production remained weak declining 13% for crude oil to 2.03 mn tons and 12% for gas to 1.12 bcm.
Raise FY2022-23E EPS factoring in larger oil and gas costs
We raise FY2022-23e consolidated EPS to Rs 21.5 and Rs 19.7 respectively from Rs 14.7 and Rs 15.3 factoring in (i) larger oil cost of $65/bbl and $60/bbl and gas cost of $2.7/mn BTU and $4/mn BTU and (ii) other minor modifications. We revise our FV to Rs 110 (Rs 90 earlier), based on 6X standalone EPS plus the worth of investments. We advise avoiding upstream PSUs offered (i) uninspiring production track record regardless of a sustained rise in capex and operating fees and (ii) restricted FCF generation and deteriorating returns profile.