Opec status quo leaves outlook subdued for oil companies

While the recent strength in oil is positive, upsides for ONGC and OIL may not be high, as cess burden, now calculated at 20%, will increase and the risk of subsidy sharing remains


The Organization of the Petroleum Exporting Countries (Opec) meeting on Thursday failed to come to any agreement to curb production. Photo: Bloomberg
The Organization of the Petroleum Exporting Countries (Opec) meeting on Thursday failed to come to any agreement to curb production. Photo: Bloomberg

The Organization of the Petroleum Exporting Countries (Opec) meeting on Thursday failed to come to any agreement to curb production. However, expectations were running low and the lack of progress at the meeting may not come as a rude shock.

But so far in fiscal year 2017, there has been some optimism on oil and that’s good news for Indian state-run oil producing companies—Oil and Natural Gas Corp. Ltd (ONGC) and Oil India Ltd (OIL), profits of which are highly leveraged to crude oil prices. Since 1 April, the Brent crude price has increased as much as 27% to $49.69 per barrel on Wednesday. Outages in several key producing countries such as Canada and Nigeria are responsible for the recent spike in prices.

While the recent strength in prices augurs well, it’s not as if the outlook over a medium-term perspective has turned particularly bright. “We do expect some improvement in global supply-demand balance for crude oil over the next two years,” said a report from Kotak Institutional Equities Research on Tuesday. They forecast global crude oil price at $50 a barrel for FY2017 and $55 a barrel for FY2018, according to the report.

For now, lower crude oil prices have meant disappointing net price realizations for the quarter gone by. ONGC and OIL’s net realizations came in at $34.88 a barrel and $32.62 a barrel, respectively. Further, the production performance wasn’t impressive either. ONGC’s crude oil production fell 2% year-on-year while its gas production declined at a faster pace of 10%. Sure, OIL’s gas production increased 8% year-on-year but it has declined 7.5% compared with the December quarter. OIL’s crude oil production declined both sequentially as well as compared with the year ago period.

Shares of both companies have understandably lagged the benchmark Sensex in the past year owing to low prices. Currently, ONGC and OIL stocks trade at 11 times and 10 times estimated earnings for this fiscal year, respectively. What of the future? Says Nomura Financial Advisory and Securities (India) Pvt. Ltd, while the recent strength in oil is positive, upsides for ONGC and OIL may not be high, as cess burden (now calculated at 20%) will increase and the risk of subsidy sharing remains. “Also, a sharp 20% cut in the domestic gas price will offset some of the oil price gains,” pointed out analysts from Nomura in their March quarter results review, adding that they expect a further 17% cut in the gas price from 1 October. It goes without saying that any relaxation on the cess charges, if it happens, will be a positive.

The writer does not own shares in the above-mentioned companies.

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