Shares of Oil and Natural Gas Corp. Ltd (ONGC) have had a stunning recovery in recent months. From its annual closing low around mid-February, the ONGC stock has appreciated as much as 27%. Of course, until February, the shares had declined meaningfully in the previous months back then. Investors have been worried that the state-run upstream oil producer would have to bear some subsidy burden for financial year 2019. As such, the recent increase in share price is some catch-up and thanks to declining fears of subsidy sharing, said analysts. What’s more, ONGC has told analysts that upstream companies are unlikely to share the subsidy burden now.

The government has created a reasonable budgetary provision of 37,500 crore for the FY20 cooking fuel subsidy, which implies zero burden on upstream PSUs as long as Brent averages under $65 a barrel, said analysts from SBICAP Securities Ltd. While this augurs well, a sharper decline in broader crude prices will mean lower prices realisations. Brent crude prices are flirting with $60 a barrel and to that extent, ONGC’s realisations will track crude prices in the absence of subsidies. Note that at $68 a barrel, ONGC’s net price realisations for the financial year were at a record high. The company did not share any subsidy burden last year.

As far as financial performance goes, the recently announced March quarter financial results were disappointing with net profit missing Street estimates owing to some one-off provisions. Nonetheless, ONGC ended FY19 with a 38% year-on-year growth in its consolidated earnings per share to Rs23.81. Indeed, this may sustain in financial year 2020 helped by higher gas prices in the half year ended September, wrote analysts from Jefferies India Pvt Ltd in a report on 31 May. “With room for upside if the 5,600 crore subsidy burden (or ~Rs2/share) that we model proves too harsh," they added.

It also helps that valuations are not demanding. Currently, the ONGC stock trades at around seven times estimated earnings for this financial year, according to data from Bloomberg. Needless to say, investors would do well to follow oil prices. At the moment though, the outlook seems to be bearish, as global oil demand is not expected to be as robust. Of course, with ONGC, oil prices cannot increase too much as well. That’s because subsidy sharing concerns again start to kick in if oil prices rally sharply. In any case, ONGC’s stock is discounting a much lower net crude realization than the prevailing crude prices, pointed out the SBICAP analysts in a report on 31 May.

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