ONGC's Q4FY18 results (Outperformer) - Q4 a miss, but strong profitability ahead
Q4FY18 result highlights
- ONGC adjusted PAT of Rs59.1bn, down 15% yoy but up 18% qoq (IDFCe Rs52.4bn), with EBITDA of Rs114bn (-9% qoq, IDFCe Rs125bn). FY18 adj EBITDA/PAT of Rs442.6/199.5bn vs FY17 adj EBITDA/PAT of Rs399/201bn.
- Oil production at 6.2mt, down 3% yoy, 2% qoq (IDFCe 6.49mt). Gas production of 6.08 bcm, up 3% yoy, down 2% qoq (IDFCe 6.3bcm). Management has attributed the decline to replacement activity at several projects and a shutdown at the main gas processing plant in Q4.
- FY18 oil prod of 25.4mt, flat yoy/ gas prod of 24.6bcm +6% yoy, (+4.3 mmscmd). FY19E target of oil production at 25.9mt and gas production of 25.5bcm +2/4% yoy respectively.
- Net realisations of $66.7/bbl for the qtr, up 22% yoy (IDFCe $65/bbl) in line with the 24% yoy increase seen in Brent crude prices. Average gas realisations of Rs7.6/scm were up 1% yoy (IDFCe Rs7.6/scm). FY18 oil realisations of $57/4/bbl (+$7/bbl yoy).
Key positives: Growth in gas volumes, with guidance of strong growth over FY19-21E.
Key negatives: Sharp increase in DD&A costs/opex, near term stress on Balance Sheet due to HPCL stake buy.
Impact on financials: FY19/20E EPS revised +5.6/-5.8% due to changes in oil price and volume assumptions. TP revised up to 245/sh.
Valuations & View
We believe the market is overcompensating for the near term uncertainty on ONGC, due to stress on the balance sheet from the acquisition of the 51% stake in HPCL and the fears of subsidy coming back in FY19E. ONGC trades at attractive 8.3x FY19E EPS/4.5x EV/E, which does not take into account the impressive 2/6% CAGR (FY17-21E) in group oil/gas output, the material boost to earnings/value from the start-up of the KG Basin asset and the traction from OpAL by FY20E. A scenario which factors US$12/bbl subsidy for ONGC @US$75/bbl Brent crude still delivers an EPS of Rs21/sh for FY20 (ONGC+OVL+OpAL), same as our current estimates (as we anyways factor net realisations of only US$63/bbl), implying limited downside risk. Additionally, EPS contribution from MRPL/KG Basin and HPCL are significant, implying group EPS will see a CAGR of 21% over FY17-21E. Reiterate outperformer.
Oil and Natural Gas is engaged in exploration, development and production of crude oil and natural gas. Co.'s business also includes niche areas like -processing of crude oil & natural gas; oil field services, transportation of the oil and natural gas, production of value added products like - LPG, Naphtha, Superior Kerosine Oil, ATF, C2-C3, etc., Refinery, Petrochemicals, Power, unconventional and alternate sources of energy. Co.'s five international locations as per oil & gas production are in Vietnam, Russia, Venezuela, Sudan, South Sudan, and Colombia. Co.'s five international locations as per oil & gas reserves are in Russia, Venezuela, Sudan, South Sudan, Myanmar and Vietnam.
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