Higher output, reasonable valuations positive for upstream major ONGC

Upstream majors ONGC and Oil India (OIL) results for the January-March quarter (Q4) of FY24 suggest better production in future. But OIL missed its own production targets although it delivered higher volumes and it disappointed the market in terms of Ebitda.

ONGC reported standalone Ebitda of Rs 17,400 crore (up 7 per cent year-on-year or Y-o-Y) in Q4FY24, slightly below estimates due to other higher expenses. This was due to one-off charges of Rs 900 crore for tax-related matters. The Q4FY24 PAT was 13 per cent higher, due to lower depreciation and less expense for dry well write-offs.

The management expects total production (excluding joint ventures) to rise to 47 million metric tonnes of oil equivalent (mmtoe) in the next three years from 39 mmtoe now, driven by KG-98/2 and Daman developments.

ONGC’s oil production is projected to rise from 19.2 mmtoe in FY24 to 22 mmtoe in FY27. Gas production is projected to rise from 19.3 billion cubic meters (bcm) in FY24 to 25.5 bcm in FY27.

Gas production from the KG-98/2 asset, which will begin in Q3FY25, is expected to hit 10 mmscmd (million metric standard cubic meters per day) by FY25 end, while oil production could ramp up to 45,000 bpd (barrels per day) by Q4FY25.

The FY24 capex was Rs 37,000 crore, attributed to one-off projects and capitalisation of expenses. Capex may normalise at Rs 33,000-35,000 crore in FY25 (excluding green opportunities).

Crude oil sales stood at 4.7 mmt in Q4FY24, while gas sales were at 3.8 bcm, more or less in line with expectations. Value-added product sales stood at 622,000 metric tonnes (MT).

Oil realisation was around $80.8 per barrel (up 5 per cent YoY). The Ebitda was Rs 17,400 crore (up 7 per cent Y-o-Y), while PAT was Rs 9,900 crore. The PAT was boosted by lower-than-expected depreciation and dry well write-offs. Performance was also boosted by inventory gains of Rs 900 crore. The company declared a final dividend of Rs 2.5 per share, in addition to earlier Rs 9.75 per share declared in FY24.

Oil production of overseas subsidiary, OVL (ONGC Videsh) declined 2 per cent quarter-on-quarter (Q-o-Q) to 1.78 mmt, while gas production was 0.843 bcm in Q4FY24 (down 2 per cent Q-o-Q).

Crude oil sales for OVL stood at 1.184 mmt (down 3 per cent YoY), while gas sales were 0.444 bcm (down 15 per cent YoY). OVL’s revenue was Rs 2,080 crore (down 15 per cent YoY) and profit before depreciation and tax (PBDT) stood at Rs 1,880 crore (up 106 per cent YoY).

ONGC guided for 6 per cent production volume CAGR over the next three years, with rising production from KG 98/2, Daman upside development, and monetisation of stranded gas reserves. Executing this will be crucial.

The company announced 11 discoveries in FY24, and has monetised seven of these 11 discoveries, besides four discoveries from FY23. It plans to monetise 8-10 discoveries in FY25.

ONGC achieved its highest-ever standalone PAT of Rs 40,530 crore and highest-ever consolidated PAT of Rs 57,100 crore in FY24. ONGC has 37 JU rigs, (six owned, rest hired) and does not think there will be shortage of rigs.

ONGC announced Rs 18,000 crore investment in Opal (ONGC Petro Addition) and expects pending approvals soon. In FY23, OPAL reported PAT loss of Rs 4,000 crore, which narrowed to Rs 3,300 crore in FY24. ONGC plans to convert debt to equity and expects OPAL to break even in a year or two.

While gas and crude prices stay high, ONGC would do well though profits are capped by windfall taxes. Net of windfall tax, realisation is between $75-76 per barrel. Gas realisations of new wells would also be at 20 per cent premium to APM (administered pricing mechanism) gas.

The upside in production volumes coupled to reasonable valuations are two reasons why most analysts are bullish on the stock.

According to Bloomberg, 17 out of 23 analysts polled post Q4 results are bullish on ONGC; their average one-year target price is Rs 307.4. For OIL, 6 of 7 analysts are bullish; target price is Rs 729.7.