ONGC’s performance hinges on recovery in oil realizations1 min read . Updated: 13 Jan 2021, 10:55 PM IST
- ONGC's realisations outlook has improved owing to firm crude prices and Brent crude oil futures trading around $56 a barrel
- ONGC is expected to report net realisations of $44 a barrel in the December 2020 quarter, an improvement from $41 a barrel in the September quarter
Rising crude oil prices have come as a ray of hope for ONGC as they are likely to support the company’s net oil realization and in turn, earnings.
In 2020, a drop in crude prices in the wake of the pandemic had dimmed the company’s earnings prospects significantly. Brent crude oil future prices moved in the $37-40/barrel range at the start of the December quarter. But prices are now trading close to 11-month highs with Brent above $50 per barrel. Sustaining the levels, however, remains crucial.
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ONGC’s stock has gained about 60% since October, a sign that investors are noticing the change in prospects.
The upstream oil producing firm is expected to report net realizations of $44 a barrel in the December quarter, an improvement from $41 a barrel in the September quarter, according to analysts.
However, the expected net realization is still 26% lower on a year-on-year basis. For net realizations to improve further, crude prices need to sustain current levels or even move up. Production discipline by oil-producing nations and continued improvement in global oil demand will thereby be keenly watched.
The boost to oil realizations is also necessary since ONGC’s production is likely to remain flat. Though some promises are offered by fresh oil and gas discoveries, analysts at Motilal Oswal Financial Services expect the company’s oil production to remain flat over the next two years.
Meanwhile, gas sales and prices are also expected to remain under pressure for ONGC. Natural gas sales volume is expected to decline 3% to 4.7 billion cubic metres in the December quarter, according to Kotak Institutional Equities. The delay in demand recovery and production ramp-up due to the pandemic has dashed expectations of an increase in gas output. Meanwhile, gas prices are also under pressure. Domestic gas prices were cut 25% in the second half of FY21, a fallout of weak international prices. These would be reviewed only in March.
Ergo, the gas segment’s contributions in the near term may not provide a meaningful upside to ONGC’s earnings.
While valuations remain attractive at about 3.2 times FY22 estimated earnings, investors may look out for more improvement.