ONGC's Q3FY19 results (Outperformer) - Higher realisations, gas production offset weaker oil volumes

Q3FY19 result highlights

• ONGC’s PAT of Rs82.6bn (+65% yoy, flat qoq), beat IDFCe Rs69bn on lower other expenses and higher than expected other income. EBITDA of Rs165.7bn (+33% yoy, IDFCe Rs151.7bn). 9MFY19 adj. PAT was at Rs 236.6bn (+68.6% yoy).
• Oil production at 6 mt, down 4.8%/flat yoy/qoq (IDFCe 6.1mt). Gas production of 6.7 bcm, was up 7% yoy, 5% qoq (IDFCe 6.4bcm). ONGC remains confident of achieving gas production target while expects to miss their oil production target by 4-5% in FY19. 9MFY19 total production at 37.6mmtoe (flat yoy).
• With the lower oil production in 9MFY19 (18.3mt, -4.7% yoy), we see downside risk to FY19E target of oil production at 25.9mt. Gas production target of 25.5bcm is on track (19.3bcm, +3.9% yoy). 
• Net realisations of $66.4/bbl for the qtr, up 9.6% yoy (IDFCe $67.5/bbl) in line with the 10% yoy increase seen in Brent crude prices. Average gas realisations of Rs10.1/scm were up 33% yoy (IDFCe Rs8.7/scm). 

Key positives: Growth in gas volumes and sharply higher gas realisations.

Key negatives: Weak oil production

Impact on financials: FY19/20E EPS revised by +4/1.5% to factor lower oil volumes offset by removing subsidy burden. Introduce FY21E with EPS of Rs26.4/sh. TP revised to Rs257/sh.

Valuations & View

ONGC’s debt has reduced to Rs100bn from Rs256bn in Mar’18, reducing the stress on the standalone balance sheet, while crude prices in the range of US$60-65/bbl imply limited threat of subsidies coming back to ONGC. Therefore, we believe ONGC’s valuations remain undemanding and are attractive at 5.1x FY21E EPS/2.7x EV/E, which does not take into account the steady 1%/5.4% CAGR (FY17-21E) in group oil/gas output, the material boost to earnings from the start-up of the KG Basin asset and the traction from OPaL by FY21E (current utilisation at 75%-87%). We now exclude the subsidy element from our estimates over FY19-FY21E given the current guidance from management. Additionally, EPS contribution from MRPL/KG Basin and HPCL are significant, implying group EPS will see a CAGR of 19% over FY18-21E. Reiterate outperformer, with revised target price of Rs257, (90% upside).