ONGC's Q3FY18 results (Outperformer) - Higher DD&A partially offsets operational growth
Q3FY18 result highlights
- ONGC reported PAT of Rs50bn (+27% yoy, IDFCe Rs58.8bn) as EBITDA of Rs125bn grew 21% yoy 3% below IDFCe Rs129bn. Miss vs estimates driven by Depreciation + Exploration write off of Rs58.6bn which was up 25% yoy, driven by higher well write offs, higher depletion (IDFCe Rs50.8bn).
- Oil production of 6.34mt, 1% lower yoy, below estimates of 6.5mt. Gas production of 6.3 bcm rose 4% yoy, driven by higher Daman/C 26 volumes. OVL production of 3.5mtoe was down 2% yoy, driven by lower Sakhalin/Sudan volumes.
- Oil realisations of US$60.6/bbl, up 17% yoy, reflecting the 23% yoy increase in Brent crude prices for the qtr. Blended Gas realisation of Rs7.6/scm up 13% qoq in line with higher domestic prices from Oct.
Key positives: Growth in gas volumes, with guidance of strong growth over FY18-21E.
Key negatives: Sharp increase in DD&A costs, near term stress on Balance Sheet due to HPCL stake buy.
Impact on financials: We reduce FY18/19/20E EPS by 2.7/2.4/2.3% to factor marginally higher DD&A costs. TP revised to Rs240/sh.
Valuations & View
We believe the market is overcompensating for the near term stress on ONGC, due to soft domestic gas prices and the prospect of stress on the balance sheet from the acquisition of the 51% stake in HPCL for Rs369bn. Thus, we believe the ~3.5% underperformance to the Sensex (last 3mths) is overdone. ONGC trades at attractive 8.5x FY19E EPS, which do not take into account the impressive 3.6/7% 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 over FY18-19E, which delivers meaningful earnings accretion over the period. Additionally, overall earnings from OVL are also expected to rise steadily over FY18/19E (OVL EPS at Rs1.5/1.7 per sh over FY18/19E from Rs0.5/sh in FY17). We value ONGC at 9x adjusted consolidated EPS (ONGC+OVL+OpAL and the share of profits from MRPL of Rs2.1/sh) of ~Rs24.4/sh, with additional Rs21/sh from listed investments (@20% disc to CMP). 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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