Oil and Natural Gas Corporation - Steep opex fall helps remain in the black despite low prices - ICICI Securities

Oil and Natural Gas Corporation's (ONGC) Q1FY21 standalone and consolidated EPS was down 92-98% YoY, hit by fall in oil & gas realisation, sales volumes and other income. What is encouraging is ONGC remained in the black despite low oil & gas prices, which was due to 40% (US$11.3/boe) YoY decline in opex. We believe oil is out of the woods and will gradually rise. Recent indications from GoI, that it is unlikely to divest its stake in PSUs like ONGC, are encouraging as divestment via ETFs has hurt ONGC's stock performance. Gas price reforms or deregulation could be a trigger. We reiterate BUY on ONGC.

- Q1FY21 EPS plunged; 40% opex cut helped remain in the black: Q1FY20 standalone EPS was down 92% YoY, hit by fall in oil and gas realisation by 53-29%, oil & gas sales volumes by 2.6-15.2% and other income by 39% YoY; own oil sales volumes were up 1.3% YoY. ONGC remained in the black despite oil price realisation at US$28.7/bbl and gas at US$2.66/mmbtu due to fall in opex by 40% (US$11.3/boe) YoY - statutory levies by 52% (US$6.6/boe), cost of materials by 54% (US$0.7/boe) and other expenses by 28% (US$4/boe). Interest and exploration costs were down 24-52% YoY. Consolidated EPS fall was steeper at 98% YoY due to share of loss of associates of Rs5.6bn (profit of Rs2.7bn in Q1FY20) and subsidiary OVL of Rs3.3bn (Rs12.5bn profit in Q1FY20).

- Oil out of the woods: Brent is over US$45/bbl now and US$43.5/bbl in Q2FY21-TD vs US$31.4/bbl in Q1FY21. OPEC+ output cut agreement up to Apr'22, fall in US oil output by over 2m b/d from peak and recovery in global oil demand from lows has helped ensure demand now exceeds supply and global inventory, which was up ~1.5bn boe in H1CY20, is gradually declining. Global oil demand recovery stalling and very weak refining margins, which has capped throughputs, are likely to cap oil prices in the near term. However, we believe oil is out of the woods.

- Triggers - no stake sale & gas price deregulation: The divestment (DIPAM) secretary has, in a recent interview, said there would be no PSU ETFs for quite some time and OFS would be of companies market wants and at valuations, which strike balance between interest of investors and GoI. This indicates divestment of GoI stake in ONGC is unlikely for quite some time; continuous divestment by way of ETFs in the last 2-3 years has hurt ONGC's stock performance. Under the prevailing gas pricing formula, gas prices would be ~US$2.2/mmbtu in FY21E. Deregulation of gas prices could improve investor sentiment in ONGC and its earnings; spot LNG price, which was at US$2.1/mmbtu in Q1FY21, is over US$4/mmbtu now. The recent launch of gas trading exchange, and the oil minister's comments on gas price deregulation, are encouraging. We keep our earnings estimates and target price of Rs124/share (55% upside) unchanged. We reiterate BUY on ONGC.

Shares of OIL AND NATURAL GAS CORPORATION LTD. was last trading in BSE at Rs.80.25 as compared to the previous close of Rs. 79.35. The total number of shares traded during the day was 1134523 in over 5881 trades.

The stock hit an intraday high of Rs. 81.7 and intraday low of 79.5. The net turnover during the day was Rs. 91201082.

Source : Equity Bulls

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