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ONGC Ltd’s performance for the quarter ended December bore the impact of lower realization in the oil and gas business as well as in value-added products. Crude oil production and sales, on the other hand, continued to rebound, ever since the easing of lockdown-related restrictions.

ONGC has almost reached last year’s production levels for crude oil from its operated blocks, said the company. However, with crude production from joint ventures still down 16.7% year-on-year, total crude oil production at 5.632 million metric tonnes (mmt) fell by 3.3% year-on-year.

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Total gas production, too, declined 5.9% year-on-year. Net oil and gas sales stood in line with our estimate at 5.3 mmt and 4.5 bcm (billion cubic metres) respectively, said analysts at Motilal Oswal Financial Services Ltd (MOFSL). Even as oil sales have more or less recovered, crude oil price realizations from nominated fields at $43.2 a barrel were 27.7% lower year-on-year.

Subdued realizations
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Subdued realizations

The regular decline in international gas prices has also meant that gas price on gross calorific value basis at $1.79 per MMBtu (million British thermal units) was much lower than $3.23 per MMBtu in the year-ago quarter.

With the significant weakness in realizations, ONGC’s net sales at the standalone level were down 28% y-o-y, while adjusted net profit was down 67.4%.

The improvement in realizations thereby holds the key for the company’s earnings prospects. Analysts at MOFSL said for ONGC, cash flow breakeven stands at $50-55 a barrel for oil and $3-3.5 per MMBtu for gas.

On the positive side, rising spot prices of gas are driving some hopes on the domestic gas prices. Analysts expect some upward revision form 1 April.

Also, crude oil prices have remained firm. Brent futures in the current quarter are trading above $50 a barrel levels and even crossed $60 a barrel levels recently. The hopes that this may lead to ONGC reporting better realizations during the January-March quarter is driving stock prices. The stock is up almost 7% in two trading sessions post-results, and has risen 60% from its lows in end-October.

Nevertheless, oil prices are unlikely to sustain over $60 a barrel as supplies from OPEC-plus countries may normalize, said analysts. “We expect oil prices to remain at $50/barrel in FY22/23, versus $59/barrel in FY20, given the weak global macro," said analysts at HDFC Securities Ltd.

Not much upside is expected in oil production, after the same normalizes to pre-covid levels. Oil production during FY21-22 is expected to remain flat year-on-year at 22.5-23 mmt as gas production is set to increase to ~23-25 bcm (+8% y-o-y) as per MOFSL analysts. This, however, is lower than their earlier estimates. Hence, with limited upside seen in oil and gas production, all eyes will be on rising realizations to lift forward earnings prospects for ONGC.

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