TOP Gainer on Nifty Today: ONGC share price up nearly 4%, here is what Emkay has to say

ONGC share price: Emkay says that Oil prices near USD70/bbl and the rise in broader energy complex augur well for ONGC. FY22/23 earnings estimates and target price of Rs 130 are based on assumption of USD 55- 56/bbl Brent prices, and hence they have a material upside. Emkay estimates a 58% increase in the domestic gas price to USD 2.8/mmbtu GCV in Oct’21 as global gas benchmarks strengthen. Current Alberta-Henry Hub rates at USD 2.5- 3.0/mmbtu and NBP (National Balancing Point.) near USD 10 imply a spot realization of USD 4.4/mmbtu for ONGC. 

ONGC’s bidding for 2mmscmd of KG 98/2 gas is underway. While the current ceiling is USD3.6/mmbtu, Emkay estimates it to jump to USD6-7/mmbtu in Oct’21 (closer to 10.5% of Brent slope sought) due to the rise in prices of alternate fuels (naphtha-FO) and LNG. The 2mmscmd first 98/2 bidding round is likely to be followed by a larger 5mmscmd round toward the year end, thereby adding over 10% to current output. Hence, ONGC could enter a cycle of production growth along with higher realization. 

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Emkay says that Brent prices continue to hover near USD70/bbl, driven by the prospects of a global demand recovery and OPEC+’s production discipline. Positive near-term demand-supply balance with inventory destocking would provide support and unless the OPEC+ deal breaks down, a significant downside risk to oil prices is low. Our current Brent price assumption is USD55/56 for FY22/23, though there is an upside risk to the same. Every USD5/bbl increase in oil realization improves ONGC’s FY22E EPS by Rs 3 per share or 22%.

While Emkay is cautiously optimistic on domestic gas pricing reforms, they estimate a 58% rise in formula prices due to the rise in global gas benchmarks. In fact current rates imply a USD 4.4/mmbtu spot price, which is 2.5x of prevailing USD 1.79/mmbtu, GCV. Rise in prices of alternate fuels like naphtha, FO and coal and LNG implies that deep water HP-HT ceiling should also increase from USD 3.6/mmbtu to USD 6-7/mmbtu, GCV in H2FY22. This would boost KGDWN-98/2 gas realization for ONGC.

ONGC’s first tender of 2mmscmd of KG 98/2 gas is under bidding and supplies are expected to start by Jul '21. ONGC has sought 10.5% of Brent with a term of 3 to 5 years. A total of 7mmscmd is over 10% of ONGC’s current gas output, thereby leading to a sizable production growth in CY22. ONGC has envisaged 15mmscmd of peak output from 98/2. Emkay values ONGC’s standalone business at 4x FY23E EV/EBITDA and listed investments at a 50% holdco discount to arrive at a target price of Rs 130/sh.