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Home >Markets >Mark To Market >A sustained recovery in crude prices holds the key for ONGC

Oil & Natural Gas Corp. Ltd (ONGC) has been seeing declining profits lately. But rebounding oil prices have provided a ray of hope. The positive news flow on vaccine-related developments has meant that crude prices gained momentum. Since ONGC’s earnings are directly linked to crude prices, its shares had gained about 21% in November.

The outbreak of covid had led to a sharp fall in consumption of petroleum products globally, affecting the demand and prices of crude oil. Brent lost almost 44% during January-October. As the leading oil producer in India, ONGC too felt its impact, with its share price almost halving during the period.

The rise in crude prices can boost ONGC’s realizations and profits. ONGC saw a major impact during the June quarter, with per-barrel oil realizations plummeting to $28.7 compared to $49 in the March quarter (at a standalone level). The Brent had ranged $23-43 a barrel during March-June. With some recovery in crude thereafter, ONGC’s realizations too rebounded to $41.4 a barrel in the September quarter, but still remained below $60.3 a barrel seen in the year-ago quarter. Hence, a further upside in oil prices is crucial for a recovery in realizations.

Subdued realizations
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Subdued realizations

The news flow on expectations that leading oil producer Saudi Arabia may raise Asia crude prices adds to investor hopes. Nevertheless, caution may prevail with a second wave of covid impacting Europe and other parts of the world.

Further, the decisions taken by the Organization of the Petroleum Exporting Countries (Opec) on continuing with the present production cuts or easing production in line with economic recovery also holds key. Easing of production can again lead to pressure on crude prices.

Analysts at Motilal Oswal Financial Services had pegged average crude prices of $45 a barrel during the second half after Q2 results in November, which translates into limited gains for ONGC. Analysts, however, say a change of $5 a barrel in oil price realization estimates on an annual basis would raise ONGC’s consolidated Ebitda by 7% and standalone Ebitda by 12% for FY22.

On the flip side, gas prices are subdued and may remain under pressure in the near term. In line with soft international gas prices, domestic gas prices for the second half of FY21 have been reduced by 25% to $1.75 mmBtu (million British thermal units).

Analysts also peg oil and gas production to remain flat in FY21 (24.8 million metric tonnes and 24 billion cubic metres respectively during FY21 over FY20). Hence, with no other triggers to support earnings, sustenance of the oil price rally holds the key for earnings prospects.

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