Pricey oil is good for ONGC, but hurdles remain
PremiumStandalone crude price realization of ONGC from nominated fields rose 86% from a year ago in nine months till Dec
High crude oil prices are expected to hurt many companies, especially on the costs front, adding to already existing inflationary conditions. However, state-run Oil and Natural Gas Corp. Ltd (ONGC) stands to benefit when oil prices spike as the company’s realizations improve. Investors have acknowledged this. ONGC’s share price is up by 22% so far this year.
Against this backdrop, some analysts have revised their earnings estimates upwards for the financial year 2023. Brent crude prices are now hovering around $120/barrel amid the ongoing Russia-Ukraine conflict. To be sure, Brent crude prices had increased by 50% over 12 months before Russia invaded Ukraine in the early hours of 24 February.
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Indeed, ONGC has benefited from a higher crude price environment in FY22. For the nine months ended December, standalone crude price realization from nominated fields stood at $70.26 a barrel, increasing 86% from a year earlier.
Of course, hereon much depends on where crude prices settle on a sustainable basis. The path ahead may not be easy.
Nitin Tiwari, an analyst at Yes Securities, said, “This could possibly be the best-case scenario for ONGC as oil prices will eventually cool off. Investors can use this opportunity to book profits. Moreover, it remains to be seen if global oil prices continue to increase, whether the government would allow ONGC to retain the benefits of higher realizations."
Meanwhile, ONGC also has exposure to Russia and investors would do well to track news flow on that front in the coming days. Kotak Institutional Equities points out that about 19% of ONGC’s total oil volumes and 10% of total gas volumes are estimated to come from Russia in FY23.
ONGC is also set to benefit from the anticipated rise in domestic gas prices on the back of a sharp rise in international prices. However, according to Kotak, there is a risk of the government putting a cap on domestic natural gas prices, given the sharp jump in FY23 gas prices based on the applicable formula for natural gas prices in India.
To be sure, these concerns may well cap significant near-term upsides for the ONGC stock. Plus, production performance is nothing to write home about.
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“Operationally, the company’s production performance has been disappointing over the past few years even as capex has increased," Tiwari said.
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