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Better crude price realisations helped, which increased to $41.4 per barrel last quarter from $28.7 a barrel in the June quarter. (Photo: Reuters)
Better crude price realisations helped, which increased to $41.4 per barrel last quarter from $28.7 a barrel in the June quarter. (Photo: Reuters)

ONGC’s Sep quarter results won’t move the needle for its shares

But ONGC’s shares have hardly budged since its results were announced late last week, staying in the range of 71-72 apiece. In fact, the stock is far away from its pre-covid highs seen in January, having declined as much as 45%

State-run explorer Oil and Natural Gas Corp. Ltd’s (ONGC) standalone revenue fell almost 31% year-on-year in Q2, though it marked an improvement from the 51% y-o-y drop in the June quarter. Crude price realizations were better, increasing to $41.4 per barrel last quarter from $28.7 a barrel in the June quarter. However, note that realizations are still 31% down y-o-y.

ONGC’s standalone net profit of 2,877 crore includes the impact of an exceptional item worth about 1,240 crore pertaining to impairment loss. Pre-tax earnings before exceptional items stood at 5,228 crore, driven by higher-than-expected other income and lower interest expenses and depreciation costs.

“ONGC’s Q2FY21 results were well ahead of our expectations boosted by higher value-added-products sales volumes, higher realizations, reduction in other expenses and favourable movement in below-Ebitda items," wrote analysts from Kotak Institutional Equities in a report on 18 November.

Rising from low
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Rising from low

For Q2, ONGC’s consolidated reported net profit came in at 5,800 crore. Even so, the company’s shares have hardly budged since the results were announced late last week; remaining in the range of 71-72 per share. In fact, the stock is far away from its pre-covid highs seen in January, declining by as much as 45%. This is when benchmark indices, Nifty 50 and BSE Sensex have touched an all-time high this week.

Despite lower valuations, investors have shied away from the stock for a couple of factors, which may not alter quickly. Firstly, ONGC’s production performance has been a sore spot and analysts expect near-term outlook to be muted. Last quarter, standalone production of crude oil and gas fell by 2.7% and 6.2% y-o-y, respectively.

Secondly, crude prices are unlikely to rise meaningfully. “We expect Brent crude prices to stay subdued and average at $40 a barrel in FY21 and $50 a barrel in FY22," said analysts from JM Financial Institutional Securities Ltd in a report on 17 November. This is on the back of International Energy Agency’s expectation of global oil demand recovery to pre-covid levels only by CY22 and expectations of an additional 6-12 months needed to eliminate the excess OECD oil inventory of about 225 million barrels, said the brokerage. “Hence, ONGC’s profitability has been hit sharply since it needs $30-35 a barrel Brent for cash break-even," added JM Financial.

Further, the management told analysts in a post results call on 17 November that the government has formed a committee and is considering various options for market linking of domestic gas price (may be with a floor and cap). Needless to say, higher gas prices would offer some respite. “A recovery in global crude prices or deregulation of domestic gas price, albeit both unlikely in the near term, are key risks to our negative stance on upstream companies," point out analysts at Kotak.

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