ONGC gains 3% post June quarter earnings; should you buy, sell or hold?

Shares of state-run ONGC (Oil and Natural Gas Corporation) jumped 3 per cent to hit an intra-day high of Rs 81.70 on the BSE on Wednesday after the company's standalone earnings before interest, tax, depreciation, and amortisation (EBITDA) came in at Rs 5,900 crore, beating Street estimates. This was mainly due to lower other expenses (down 51 per cent sequentially and 16 per cent YoY) owing to lesser provisioning.

It's bottomline, however, missed estimates. Standalone gross revenue came in at Rs 13,011 crore, down 51 per cent YoY from Rs 26,555 crore posted in Q1FY20. Net profit, meanwhile, stood at Rs 496 crore, down a whopping 92 per cent YoY from Rs 5,980 crore.

"The revenue and PAT for Q1 have been impacted by lower crude price realization in the wake of Covid-19 fall out on global oil and gas industry as a direct consequence of adverse price movements in global crude prices. Lower gas prices also contributed to lower topline and bottomline," said the management in a statement.

The net realisation of crude from nominated fields for the April to June period was down 56.7 per cent $28.72 a barrel as against $66.32 a barrel for FY20. Crude price realisation from joint ventures also dropped 55.7 per cent to $29.6 a barrel. 

"The company continued producing and supplying crude oil and natural gas to its customers during lockdown period. Offtake of crude oil by refineries is not affected, though there has been a reduction in gas production due to less off take by some customers causing a marginal reduction in gas sale, which has been now restored to normal levels with gas demand increasing to pre-Covid-19 levels after relaxations in lockdown and gradual opening of industries and various customers," the company said in a statement.

Oil production at 5.7mmt (down 4 per cent YoY and 3 per cent QoQ) and sales at 5.2mmt were 1 per cent/4 per cent below global agency Nomura's estimates, respectively. Gas production at 5.6 BCM and sales at 4.2 BCM were, however, in line with their estimates. Value-added product sales at 0.66mmt declined a sharp 29 per cent YoY.

"We note that while oil production/sales were relatively resilient, gas production/sales decline was steeper due to demand destruction from Covid-19 lockdowns. However, with lockdown relaxations, gas demand has improved and production has been restored to pre-lockdown levels. The impact on oil production was not material; however, due to supply chain disruptions, timelines for key projects like KG gas block have been pushed back," analysts at the brokerage said in post-result note.

They, however, have 'Reduce' stance on the stock with a target price of Rs 65, valuing ONGC's standalone domestic business at 0.33x FY22F adjusted price/book. "We value its overseas E&P subsidiary, ONGC Videsh Ltd (OVL, unlisted), at 6x FY22F P/E(FY22 PAT: INR9.5bn). We value its stake in listed investments at the current market price less a 20% holding company discount to arrive at our TP of Rs 65, implying 18 per cent downside. The stock currently trades at 0.44x FY22F adjusted P/B (adjusted FY22 BVPS of Rs 126)," it said.

On the contrary, ICICI Securities has 'Buy' call on the stock with a target price of Rs 124 per share on hopes that oil demand is out of the woods and will gradually rise.

"OPEC+ output cut agreement up to Apr’22, fall in US oil output by over 2m b/d from peak and recovery in global oil demand from lows has helped ensure demand now exceeds supply and global inventory, which was up ~1.5bn boe in H1CY20, is gradually declining. Global oil demand recovery stalling and very weak refining margins, which has capped throughputs, are likely to cap oil prices in the near term. However, we believe oil is out of the woods," it said.

That apart, the government's indication that it may not sell stake in ONGC this year bodes well for the stock, they say.

"The divestment (DIPAM) secretary has, in a recent interview, said there would be no PSU ETFs for quite some time and OFS would be of companies market wants and at valuations, which strike balance between interest of investors and GoI. This indicates divestment of GoI stake in ONGC is unlikely for quite some time; continuous divestment by way of ETFs in the last 2-3 years has hurt ONGC’s stock performance," it said.

JM Financial, mean while, has 'Hold' rating on the stock with a target price of Rs 85. "We maintain HOLD due to the subdued crude price outlook vs. cash break-even crude price requirement of USD 30-35/bbl. Further, limited scope exists to cut its Rs 30,000 crore annual capex as it is largely being incurred to maintain the existing production run-rate. Government stake sale is a key overhang, while any potential deregulation/hike in domestic gas prices is a key upside risk," it said in a September 1 report.

At 10:12 am, the stock was quoting 1 per cent higher at Rs 80.25 per share, as against 0.04 per cent rise in the S&P BSE Sensex. A combined 15.18 million shares had changed hands on the counter on the NSE and BSE till the time of writing of this report. So far in the financial year 2020-21, the stock has underperformed at the bourses, up 16.17 per cent on the BSE as against 32 per cent rise in the S&P BSE Sensex.