Higher gas prices helpful for ONGC, but cheaper crude is a bigger worry2 min read . Updated: 30 Sep 2020, 09:06 PM IST
While Brent prices have recovered from April-lows, they have declined by about 38% so far this year
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.
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.