The quiet gainers of the crude oil spike

Over the past year, Brent crude prices have risen by over 50%, also helped by recovery in demand as covid-19-led restrictions eased globally. Unsurprisingly, the December quarter (Q3FY22) results of both upstream companies were robust. ONGC’s stock also touched a new 52-week high on NSE on Monday. However, the shares gave up their gains in keeping with the weakness in broader markets, closing 1% lower.

Bloomberg data shows average Brent prices rose 8.8% sequentially to $79.4 a barrel in Q3. Higher crude prices reflected in upstream companies’ crude oil realizations in the quarter. ONGC’s crude price realizations from its nominated oil fields jumped 75% year-on-year (y-o-y) to $75.73 a barrel. Oil India’s average crude realization, at $78.59 a barrel, was up 78% y-o-y. Additionally, the sharp rise in domestic gas prices by 62% to $2.90 per mmBtu (million British thermal units) from 1 October brought the companies further benefits.

The upshot: ONGC’s reported earnings before interest, taxes, depreciation, and amortization (Ebitda) increased 91% y-o-y to ₹15,970 crore. Net profit grew six-fold to ₹8,764 crore helped by higher other income. Meanwhile, Oil India reported a 38% increase in net profit to ₹1,245 crore.

On the flip side, there was some disappointment on the production front. ONGC’s total oil production at 5.451 million tonnes (MT) declined 3.2%, while gas production at 5.564 BCM (billion cubic metres) was also down 4.2% y-o-y. The company attributed the decline in output to the impact of cyclone Tauktae and covid spread, among other things. Crude oil and gas sales at 5.1MT and 4.3BCM, respectively, were lower y-o-y and about 2% up sequentially each.

Oil India also reported flat y-o-y crude oil production and sales, although the gas segment fared relatively better. As such, sustaining the trend in the gas business will have to be watched, said an analyst at a domestic brokerage. He added that better realizations are helping the earnings of both ONGC and Oil India, but volume triggers are still missing.

High oil prices would keep supporting upstream companies even as investors closely watch how the geopolitical situation evolves. However, a firm demand outlook should support oil prices on the downside. S&P Global Platts Analytics expects Asian oil demand to grow to 1.5 million barrels per day y-o-y in 2022, up from 1.2 million barrels per day in 2021.

What is more, analysts expect domestic gas prices to increase further in the financial year 2023.

However, shares of ONGC and Oil India have risen 68-94% in the past year, suggesting that a large part of the positives may be factored in. Hereon, volume growth remains critical.

A Yes Securities Ltd report dated 14 February said, “We believe that the recent rally in ONGC’s stock prices is largely fuelled by high crude oil and natural gas prices, even as its production is on the decline and capital expenditure on the rise to sustain the falling production." The report added, “We continue to believe that normalization of supplies, in the near term and a push for sustainable renewable energy, in the long run, would act as a dampener for crude oil prices."

For Oil India, the expansions at Numaligarh refinery can help improve earnings outlook. Prabhudas Lilladher’s analysts said the expansion of the refinery by 6mtpa will increase its consolidated FY25 estimated Ebitda by 2.7 times.