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A recent Bloomberg report said India is considering a floor price for natural gas produced from local fields. The proposal being considered by the oil ministry pegs gas price to benchmark Japan-Korea LNG prices with a discount. This could improve realizations of state-run oil and gas producer Oil and Natural Gas Corp. Ltd (ONGC).

Nitin Tiwari, analyst at Antique Stock Broking Ltd, said, “The move could help the company break-even on its gas production. ONGC’s average cost of gas production currently is around $3.5 per mmBtu (million British thermal units). Given the current LNG prices, the implied price realization works out to $3-3.5 per mmBtu, which would be similar to what ONGC saw in FY20."

Note that domestic gas prices were set at $2.4 per mmBtu for April-September. They have now been lowered to $1.79 per mmBtu for the October to March period.

Crude reality
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Crude reality

But the ONGC stock, which has been quite a neglected one, has increased just about 4% on the prospects of higher gas prices. “While better gas realizations could lead to some improvement in profitability, weaker crude oil prices would remain a larger concern for ONGC as revenue and profitability are skewed towards crude sales," Tiwari said.

Data from ONGC’s latest earnings presentation shows that on a standalone basis, total crude oil revenues in FY2020 stood at 66,440 crore and revenues from gas were 19,528 crore.

As such, lower crude prices are a bigger worry for the stock. True, Brent crude oil prices have recovered from their lows of $19 a barrel in April. However, so far in 2020, Brent prices have declined by about 38% and outlook is muted.

The International Energy Agency’s monthly oil market report points out, “A resurgence of covid-19 cases in many countries, local lockdown measures, continued teleworking and the weak aviation sector led to downward revisions of our demand estimates for 3Q20 and 4Q20 by 0.1 mb/d (million barrels a day) and 0.6 mb/d, respectively." The agency’s report on 15 September said, “For 2020, demand will fall versus 2019 by 8.4 mb/d, more than the 8.1 mb/d seen in the last report."

Lower crude prices have weighed on ONGC’s revenues in the June quarter when crude price realizations fell by almost 57% on a year-on-year basis to $28.72 per barrel. Brent prices have not seen a sharp jump during the September quarter, which should reflect in ONGC’s crude realizations as well.

It also doesn’t help that ONGC’s production outlook is unexciting.

Even so, there is a silver lining to this story. The ONGC stock has declined by a whopping 46% from its pre-covid highs in early January. This has rendered valuations attractive, although sharp upsides can be ruled out from a near-term perspective given the gloomy prospects.

ABOUT THE AUTHOR
Pallavi Pengonda
Pallavi Pengonda is a financial journalist producing cutting edge commentary and analysis on companies, economy and market trends. Over her journalism career spanning more than 14 years, she has covered topics across sectors such as oil & gas, consumer, aviation and new age tech companies. She heads the Mark to Market team and joined Mint in June 2010. She lives in Bengaluru. She is an art enthusiast and likes to paint in her leisure time.
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