Higher oil prices key for state-run oil producers
Lower crude oil and gas prices, along with unexciting production trends, have kept sentiments low
Shares of state-run oil producers Oil and Natural Gas Corp. Ltd (ONGC) and Oil India Ltd (OIL) have risen about 5-6% year-to-date. That falls short of an about 10% increase seen in the benchmark Sensex. Lower crude oil and gas prices, along with unexciting production trends, have kept sentiments low for these stocks.
According to some analysts, things may soon get better. Spark Capital Advisors (India) Pvt. Ltd pointed out in a report on ONGC recently that crude oil prices are likely to head towards $60 a barrel over the next 12-18 months, led by ongoing capex (capital expenditure) and production cuts across the E&P (exploration and production) industry, a potential supply freeze by members of the Organization of the Petroleum Exporting Countries over the next 12 months, likely narrowing of excess supplies and stabilization of prices from the latter half of the current fiscal year.
Needless to say, higher oil prices are key for investor sentiment to revive in these stocks. The recently announced June quarter results of these companies reflect the impact of lower crude oil prices. Net price realizations of both companies declined year-on-year. ONGC and OIL’s net realizations declined 22% and 25% to $46.1 a barrel and $43.09 a barrel, respectively. But that was on expected lines. The measure was higher sequentially, helped by a recovery in broader crude oil prices after touching lows earlier in 2016.
As expected, the drop in realization led to a drop in profits. ONGC’s Ebitda (earnings before interest, tax, depreciation and amortization) declined 23% to Rs9,390 crore. This excludes exploration costs that were written off. Again, ONGC’s Ebitda was above some analysts’ estimates owing to lower-than-expected other expenses. OIL’s Ebitda declined 29% to Rs863 crore.
On the flip side, production performance is far from encouraging. ONGC’s crude oil production declined 2% year-on-year and was flat compared to the March quarter. OIL’s crude oil production declined 4.6% over last year’s June quarter but was 2.8% higher than the March quarter. To be sure, ONGC subsidiary ONGC Videsh Ltd’s (OVL’s) production increased 12% year-on-year but that includes volumes from its stake purchase in Vankor (JSC Vankorneft), Russia. Of course, higher production from Vankor should help to some extent. For fiscal year 2016, OVL reported a net loss of Rs2,094 crore against a net profit of Rs1,904 crore in FY15, as low crude oil prices caused tremendous grief.
ONGC and OIL both currently trade at about 12 times their estimated earnings for this fiscal year. Even as valuations appear undemanding, as mentioned earlier, higher oil prices are essential for improving sentiments for both stocks. Improving production will be a bonus.