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ONGC investors need faster production ramp-up from KG basin
Summary
- The state-owned company is relying on KG basin 98/2 block as it looks to increase output to 47 million tonnes of oil equivalent by FY27, but the production ramp-up at this crucial block has been slow so far.
Oil and Natural Gas Corp Ltd’s (ONGC’s) standalone Ebitda of ₹18,600 crore for the June quarter (Q1FY25) was above analysts’ estimates but 4.3% lower year-on-year. While production volumes were lower last quarter, ONGC aims to increase output by 19% to 47 million tonnes of oil equivalent (mmtoe) by FY27.
This should be aided by higher production from the KG basin 98/2 block, where the ramp-up has been slow. Oil production from the block is currently 12,000 barrels per day (bpd). This is projected to rise to 30,000 bpd by Q3FY25 and 45,000 bpd by the end of FY25. Gas output is expected to rise from 1.6 million metric standard cubic metres per day (mmscmd) to 6 mmscmd by the end of FY25.
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KG 98/2 should contribute more to profit since oil output from the block won’t attract the windfall tax and gas prices are expected to be higher over the next few years. Hemang Khanna, an analyst at Nomura Financial Advisory and Securities (India), also expects ONGC to benefit from higher oil and gas volumes in the coming years; favourable cess and royalty structures; and a rising share of gas volumes with premium pricing from the end of FY25. “We conservatively build in oil volume growth of 4% and gas volume growth of 6% over FY24-26F," Khanna wrote in a report dated 6 August.
Can KG 98/2 halt production decline?
The development of this block should help address the decline in production from about 65 mmtoe in FY19 to 52 mmtoe in FY24 (including ONGC’s share in joint ventures and ONGC Videsh Ltd). The company is also developing other fields. Overall capex guidance for FY25 and FY26 stands at ₹32,000-33,000 crore, slightly lower than the ₹35,000 crore spent in FY24.
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In Q1FY25, ONGC’s net realisation after the windfall tax was $73 per barrel, marginally lower than in the previous quarter. The windfall tax, introduced in July 2022, caps the upside from increases in oil prices to counter the impact of volatility in crude. For instance, Brent crude oil prices averaged $100 in 2022 and fell to $82 in 2023. Crude rose to almost $90 in April 2024, but is now around $82. The government has also allowed 20% higher prices for gas produced from difficult fields, a move that should be finalised by the end of FY25. The company expects about 25% of its gas production to be eligible for this premium.
ONGC’s stock is up nearly 90% over the past year owing to a strong outlook on volume improvement and profitability. From here, investors will keep a close eye on the production ramp-up from KG 98/2.
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