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With ONGC shares struggling, a quarter’s earnings beat won’t be enough

ONGC’s standalone net profit for the FY21 June quarter declined a whopping 92% year-on-year to  ₹496 crore. (File Photo: Bloomberg)Premium
ONGC’s standalone net profit for the FY21 June quarter declined a whopping 92% year-on-year to 496 crore. (File Photo: Bloomberg)

Analysts say ONGC’s better-than-expected June quarter profit can be attributed to lower than estimated operating costs. Other expenses declined 16% year-on-year, while statutory levies and exploratory costs written off fell about 52%

This is a year of many unpleasant firsts. In February, shares of Oil and Natural Gas Corp. Ltd (ONGC) fell below 100 apiece for the first time since 2005. Now, the ONGC stock trades at around 80.

“Continuous divestment by way of ETFs in the last 2-3 years has hurt ONGC’s stock performance," said a report by ICICI Securities Ltd on 2 September.

Agreed, the substantial underperformance renders valuations appealing. “But valuations were attractive six months ago as well and that’s clearly not exciting investors," said Probal Sen, senior vice-president, Centrum Broking Ltd.

As such, the near-term outlook for the stock continues to remain clouded for two main reasons. “First, older oil fields would mean oil production is likely to remain subdued. Two, oil prices outlook is weak as markets are suitably supplied and demand remains sluggish amid the pandemic," said Nitin Tiwari, an analyst with Antique Stock Broking Ltd.

For the June quarter, crude oil production declined by 3.5%. Gas output declined at a faster pace of 13.6% and offtake by some customers was lower. Moreover, covid-19 disruptions took a toll on global crude oil prices. Benchmark Brent crude oil prices dropped to a low of $19 a barrel in April, but have recovered to about $46 a barrel currently.

Lower prices impacted ONGC’s revenue performance for the June quarter with crude oil price realizations declining by nearly 57% to $28.72 per barrel. This is also far lower than the March quarter crude realization, which was $49.01 per barrel. Moreover, gas prices were lower as well, contributing to subdued revenues. Overall, ONGC’s standalone revenue decreased by 51% year-on-year to 13,011 crore.

Net profit declined by a whopping 92% to 496 crore, but it was much better than the loss of 54 crore that a Bloomberg poll of analysts had estimated.

ONGC’s better-than-expected Q1FY21 profit can be attributed to lower-than-estimated operating costs. Other expenses declined by 16% compared to last year’s June quarter. Statutory levies and exploratory costs written off fell by about 52% year-on-year.

Even so, not everyone is thrilled with the earnings beat. “True, June quarter earnings beat estimates, but that was owing to better cost management, which are transient. ONGC’s production remained muted and management commentary suggests gas production improvement is still some time away," said Sen.

Even as ONGC shares increased by 1% on Wednesday post results, the stock is still about 38% lower from its pre-covid highs seen in January. Tiwari said: “Gas price deregulation could be a trigger, but that’s still some time away and limited number of players in the Indian gas market make price discovery challenging." In short, sharp upsides in the stock in the near future will be hard to come by.

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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