The rising crude prices bode well for the realizations of these companies and hence improve earnings outlook. With Diesel and petrol prices getting market-linked, these companies have no major subsidy burden to be shared with oil marketing companies now.
Rising crude prices continue driving prospects for the upstream companies as ONGC and Oil India Ltd. Oil India, up about 44% on the bourses since its November lows, added about 4% to its gains on Tuesday. ONGC, the larger peer, too was up around 7% in today's session, adding to more than 73% gains since the start of November.
The rising crude prices bode well for the realizations of these companies and hence improve earnings outlook. With Diesel and petrol prices getting market-linked, these companies have no major subsidy burden to be shared with oil marketing companies now. Hence these companies are a pure-play on the crude oil price say analysts.
The companies have witnessed regular improvement in quarterly performance too with rising realisations and normalised supplies post easing of lockdown.
Oil India's crude oil realisation improved to $42.8/barrel in Q3FY21 up 3% sequentially. Even ONGC's crude oil realisation stood at 44.2/barrels, up 2.5 % sequentially. These are expected to further inch upwards significantly as Brent has consistently traded above $50 a barrel and even has crossed $60 a barrel.
On the positive side, with regular increase in spot gas prices, the domestic gas prices that are reviewed after every six months are also to some upward revision from 1st April. This will further boost the earnings.
For Oil India, the concerns remain on the production front. Analysts at HDFC Securities Ltd remain cautious on the stock citing lack of production growth for both oil and gas as one of the reasons.
Meanwhile, ONGC though is to see some rise in gas production even as oil production is to remain stable. “Despite the continued delay, ONGC’s gas production is likely to clock an annual growth of 6% over FY20–23" say analysts at Motilal Oswal Financial Services Limited. However Oil production is likely to remain stable at similar levels over FY22-23 as per their estimates.
The key for earnings growth thereby hinges on the sustenance of crude prices at higher levels. Analysts feel that the oil prices are unlikely to sustain over $60 a barrel as supplies from OPEC plus countries may normalise . Even analysts at HDFC Securities expect oil prices to remain at $ 50/barrel in FY22/23 versus $59/barrel in FY20.