Q1 results beat, valuations factor in bright prospects for ONGC stock

The company guidance is to add over 100,000 square kilometres of exploratory area annually, and spend Rs 10,000 crore each year on exploration

India’s largest crude oil and natural gas producer, ONGC’s June quarter (first quarter of financial year 2023-24 or Q1FY24) results beat the Street’s estimates. The standalone reported operating profit was Rs 19,450 crore. It was down 25 per cent year-on-year (Y-o-Y) and up 19 per cent quarter-on-quarter (Q-o-Q), due to higher realisations in the sector. The Y-o-Y drop was against a high base as global energy prices had spiked in Q1FY23 due to the Russia-Ukraine war. Standalone revenues were at Rs 33,810 crore. Profit after tax (PAT) came in at Rs 10,020 crore, down 34 per cent Y-o-Y.

Management guidance is that oil production from the KG-DWN-98/2 block should commence in Q2FY24 or Q3FY24. At peak, oil production from the new well is likely to be 40,000-45000 barrels per day. One relief for the company is that the government has adjusted windfall tax in-line with crude oil fluctuations and reviews it every fortnight. Analysts estimate that the windfall-adjusted realisations could be between $68-$81/barrel and crude prices should be in the range of $70/barrel Q2FY24 onwards.

Another point of relief is the fixed gas prices according to the Kirit Parikh formula. Gas price assumptions could be averaged at $6.7/metric million British thermal unit (mmbtu) for FY24 and FY25. Additionally, the 6-8 per cent of administrative price mechanism for gas production that will come from new wells will be at a premium of 20 per cent.

Crude oil sales stood at 4.7 million metric tonnes (mmt), while gas sales stood at 4.1 billion cubic metres (bcm), both of which are within estimates. Value-added product sales were along expectations of 589 mmt. Realisations were at $76.5/barrel and the net of windfall tax came in at $74/barrel. Gas realisation was Rs 6.71/mmbtu and profit of petroleum sales was at Rs 300 crore.

The company’s guidance is to add over 100,000 square kilometres of exploratory area annually, and spend Rs 10,000 crore on exploration each year. Capex guidance for FY24 stands at Rs 30,100 crore and ONGC has approved three new projects for a capex of Rs 5,880 crore. ONGC is also looking at a Rs 7,000 crore -8000 crore expenditure of petchem at MRPL and may also consider constructing a new petchem facility (with a budget of Rs 30,000 crore-40000 crore).

ONGC’s overseas arm, ONGC Videsh’s (OVL’s) crude production has recovered gradually even though the PAT came in lower. In Q1FY24, OVL’s crude output rose 6.6 per cent Q-o-Q to 1.8 mmbtu. The gas output was down 14 per cent Q-O-Q to 0.83 bcm. OVL’s reported PAT was significantly lower at Rs 130 crore in Q1FY24 (versus the average PAT of Rs 1,600 crore-1,800 crore for the full year, over FY21-23). Recovery here would be a serious upside for ONGC.

Given that the realisations/barrel are higher than estimated and gas realisations are stable, investors should note that ONGC is also a good play for dividend, with a likely yield of 6 per cent or more at the current price. Moreover, valuations must take its overseas exposure in OVL, and downstream investments in HPCL, MRPL into account. Taken together, a case can be made for suggesting that the public-sector undertaking is significantly undervalued.