ONGC, Oil India stocks appear undervalued

Crude and gas supply concerns have eased amid reports that Israel and Hamas have struck a peace deal.

The International Energy Agency estimates oil demand may drop slightly in calendar 24 but Opec probably has enough pricing power to maintain $80/ barrel Brent prices.

Russia’s share of India’s crude imports remained strong at about 35 per cent in September 2023.

Discount on Russian crude to India narrowed to $3/bbl in September 2023 vs $6/bbl in August 2023.

This price point is still a reasonable spot for upstream players like ONGC and Oil India Limited (OIL).

Both PSUs appear to have an upside, given the current scenario.

ONGC’s Q2FY24 results were mildly below consensus.

Reported Ebitda stood at Rs 1,8360 cr (down 2 per cent Y-o-Y).

PAT came in line at at Rs 10220 cr (down 20 per cent Y-o-Y).

Net ONGC’s Q2FY24 crude oil sales were at 4.7mmt, while gas sales stood at 4bcm.

VAP sales were also in line at 651 thousand mt.

Net of a windfall tax, realisation stood at $73/bbl.

ONGC reported in line revenue of Rs 35,160 cr (down 8 per cent Y-o-Y).

The good news is that management expects oil production from KG-DWN-98/2 to start in Q3FY24.

The projected peak oil production will reach 45 kilobarrels per day by FY25.

Additionally, gas production may escalate to 10 million standard cubic metres per day (mscmd) by FY25.

Windfall taxes allow a post-windfall realisation of up to $75/bbl from Q3.

Under the new gas pricing policy, gas produced from new APM fields or Intervention in existing fields will attract 20 per cent premium over APM prices.

Around 6-8 per cent of ONGC’s gas production comes from new wells.

Gas price may be assumed at $6.5/mmBtu from Q3FY24.

ONGC targets increased production by 1 per cent in FY24 and 5 per cent in FY25.

Exploration in 2HFY24 will focus on Mahanandi Basin, Western Offshore, Assam Basin, and Bengal Basin.

The company will also be infusing an additional Rs 18,300 crore in OPAL.

It intends to seek permission to utilise gas from new wells and well interventions in OPAL.

Management expects OPAL to turn profitable from FY25 which is also a positive signal.

However, consolidated estimates may be downgraded somewhat due to the weak performance by OVL and ONGC’s stake in MRPL.

OIL reported better Q2FY24 results in terms Adj.

Ebitda at Rs 2,630 crore, led by higher revenue on higher sales-to-production ratio and lower opex.

Adj. PAT stood at Rs 2,020 crore, with higher other income.

Reported PAT dropped to Rs 330 crore due to a one-time provision of Rs 2,360 crore for GST on royalty.

Consolidated adjusted EPS was up 18 per cent Y-o-Y.

Crude production was in line at 0.83mmt (up 6 per cent Y-o-Y), while gas was at 0.81bcm (down 2 per cent Y-o-Y).

NRL’s operations resumed post the shutdown; with more than 100 per cent utilisation and basic GRM up to $16.0/bbl in Q2 earnings recovered to Rs 740 crore.

Guidance is for crude production target at 3.5-3.6mmtpa for FY24, while gas could see 2-3 per cent Y-o-Y growth.

Management refrained from guidance beyond FY24 but targets production CAGR of 4-5 per cent for the next 2-3 years. NRL’s recent rights issue covers the equity requirement for expansion.

Out of OIL’s total consolidated capex plan of more than Rs 13,000 crore for FY24, Rs 4,900 is standalone and Rs 8,700 crore for NRL.

Out of the total NRL expansion capex of Rs 28, 000 crore, Rs 13,000 crore has been spent till September 23 end.

The rest is to be incurred by FY25-end.  Both stocks look to be undervalued in a scenario where they are getting close to Rs 75/ barrel – the maximum post-windfall tax.

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