Rating: reduce | ONGC targets steady production

ONGC’s Q2FY24 Ebitda of Rs 18,400 crore experienced a 6% q-o-q decline, landing 8% below our estimate. This decrease can be attributed to slightly lower-than-anticipated volumes, elevated other expenses, and statutory levies. On the positive side, DD&A (depreciation, depletion and amortisation) costs of Rs 6,000 crore dropped by 11% q-o-q, surpassing estimates by 13%. This was due to a significant reduction in survey expenses and the reversal of expenses related to dry wells, albeit offset to some extent by an increase in impairment losses, rising from Rs 500 crore in Q1FY25 to Rs 900 crore.

Similarly, gas sales volumes of 4.1 billion cubic meters experienced a 1% q-o-q and 3% y-o-y decline, also falling short of our estimate.

Management outlined key points: (i) ONGC’s production is expected to remain stable in FY24 and increase by 5% in FY25, primarily due to the KG 98/2 project; (ii) Oil production from the KG 98/2 basin will commence in November 2023, reaching peak production in CY25; (iii) KG 98/2 basin production is projected at 1.5 million tonne of oil and 2 BCM of gas for FY25; (iv) OVL volumes are anticipated to grow to 10.7 million boe in FY24 and 11 million boe in FY25; (v) Standalone capex is guided at Rs 33,000-35,000 crore for FY25; and (vi) Following an incremental capital infusion of Rs 18,400 crore in OPaL, ONGC’s stake will rise to 96% from the current 49.4%. Management plans to explore strategic partnership options by FY27 and revert to a JV structure for OPaL.