ET Intelligence Group: At a time when companies are refraining from issuing guidance, ONGC, India’s largest oil exploration company, has emerged as an exception. Despite the tough economic scenario, the company has retained its oil and gas production guidance for FY21. It also surprised the street with better than expected earnings for the June quarter. However, these factors may not help the stock much given the pressure on global crude oil prices, possibility of a price cut on domestic gas and uncertainty over the extent of dividends. The stock has underperformed the benchmark index by 22% in the past three months.

The net realization of crude oil dropped to $ 28.7 per barrel in the June quarter compared with $66.3 per barrel a year earlier, while gas price fell to $ 2.4 per million British thermal units (mmbtu) compared with $ 3.69 per mmbtu. But, a lower depletion charge on the dry well cost helped the company to post a net profit of Rs 496 crore compared with the expectation of a modest loss.

A major concern for investors would be the gap between the break-even point and the market price of crude. ONGC’s break-even price was around $ 40 per barrel in FY20 and dropped slightly in the June quarter due to lower levies. The future price curve suggests that there may not be much upside for crude as global production is likely to reach to pre-COVID level by the next year. On the other hand, ONGC’s current valuation reflects crude realisation of more than $ 60 per barrel.

In addition, as a part of customary half yearly price reset, the domestic gas price is expected to drop by 25% from next month given lower international prices. This may result in a loss from gas production.

Another concern is that lower profit and necessary capital expenditure to maintain the future hydrocarbon production may take a toll on the dividend payment. ONGC had paid 45% of the profit as dividend in FY20. According to the Bloomberg consensus estimates, the company’s net profit is expected to drop by 32% to Rs 7,340 crore for FY21. Over the past eight fiscal years, its annual dividend was between Rs 7,272 crore and Rs 9,689 crore. According to CLSA, the company may pay a dividend of Rs 2 per share for FY21 compared with Rs 5 per share in the previous year. The company has also lowered its capital expenditure to Rs 26,000 crore from Rs 32,000 crore in the previous year due to delay in projects following the pandemic.

At Thursday’s closing price of Rs 79.1, the stock was traded at a one-year forward price-earnings multiple of 9.5, similar to the long term average.