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OIL AND NATURAL GAS CORPORATIO (ONGC). CMP: 197.40

Oil and Natural Gas Corporation Limited (ONGC), largest oil and gas exploration and production company in India, is expected to benefit from synergies of HPCL acquisition and improving net realizations. Gas production is expected to increase led by completion of its development projects. We expect revenue and PAT CAGR of 11% and 18% respectively over FY17-19E. This stock trades at EV/EBITDA multiple of 3.6x FY19E.

ONGC accounts for 70% of India’s oil and gas production. Its FY17 domestic oil & gas production stood at 22.5 mmt & 22.09 mmt respectively. Through its 100% subsidiary ONGC Videsh Limited (OVL), it has equity investments in E&P blocks in 16 countries. Company is investing Rs 92,000cr in 35 major projects which include 14 to bring new finds to production and six to improve recovery from the ageing fields. Capex plans will assist growth in crude oil production by 20% by FY21E and Natural gas output by 90% by FY22E.
Production from the east coast discovery is expected to start in FY20E with peak oil output at 78,069 bpd and 16.6 mcmd of gas. Post HPCL acquisition we see company to foray into downstream business of refining and marketing. With lower under recoveries we expect healthy balance sheet of company and better investments in development of oil fields in coming quarter.
Oil prices surged recently supported by strong OPEC compliance and fresh geopolitical tensions in the Middle East. Higher oil price bodes well for ONGC. We do not foresee material risk of subsidy burden (if oil price remains below USD60/bbl) resurfacing given the Centre’s push to eliminate the existing burden by increasing subsidised LPG and kerosene prices every month. Furthermore, we expect domestic gas prices to revive as it lags an oil price increase. Expected revival in gas realisation will coincide with commissioning of key projects.
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