Strong crude oil and gas prices have boosted ONGC’s results for the quarter ended December (Q3) 2021, and these conditions are likely to sustain for 2022-23. The global economy is recovering, which is pushing up energy demand. At the same time, there’s a lot of tension over the Russia-Ukraine situation, which has pushed up energy prices on fears of supply disruption. Russia is a huge energy exporter and the gas pipelines to Western Europe (which sources 80 per cent of its gas from Russia) run though the zone of potential conflict. This tension could lead to a huge spike in prices if it spirals into sanctions or armed conflict.
In Q3, ONGC consolidated revenues was reported at Rs 1.46 trillion, which was a rise of 45 per cent year-on-year (YoY) over Rs 1 trillion and a rise of 19.4 per cent QoQ over Rs 1.22 trillion. EBIDTA was Rs 21,419 crore, which was a rise of 90 per cent YoY and a rise of 20.6 per cent QoQ. The PAT was Rs 11,636 crore, a rise of 220 per cent YoY and a fall of 38 per cent QoQ due to a tax credit of Rs 6,647 crore in Q2, which boosted PAT to Rs 18,749 crore.
The key listed subsidiary Hindustan Petroleum Corporation or HPCL (where ONGC has 65 per cent stake) reported PAT of Rs 1,353 crore, versus PAT of Rs 3,170 crore (YoY) and PAT of Rs 1,919 crore (QoQ). Refining and retail margins have been squeezed as crude and gas prices have risen. ONGC also owns a 10 per cent stake in Indian Oil Corporation (IOC), which will most probably see a similar trend of lower margins.
On average, India’s crude basket cost $79 per barrel in Q3, versus $72.2 in Q2 and gas prices also rose. ONGC received a price equivalent average of $75.7 in Q3, versus a price of $69.4 in Q2. The January crude basket cost $84.67 and if these prices hold, both ONGC and OIL (Oil India) will gain substantially in terms of Q4 margins. Gas prices received by ONGC was at an average of $3.1 per mmbtu versus $2.21 per mmbtu in Q2.
While production of crude was flat in Q3 versus Q2, gas production rose marginally. Subsidiary ONGC Videsh (OVL) saw crude production decline by 9.7 per cent QoQ and down 8.8 per cent YoY while gas production volume was up 14.1 per cent QoQ and down 0.8 per cent YoY. In the longer run, if geopolitical tension eases, and there’s a restoration of normal demand-supply balance, the energy rally would reverse. However, ONGC has a significant and permanent capex requirement to arrest decline in older fields.
The short-term trend is likely to remain strong but long-term prospects could normalise if the bull market in crude and gas reverses. Analysts are divided on the valuation. ONGC trades at a low valuation to its current EPS. While the target prices over the next 12 months range between Rs 150 (which is negative return) and Rs 230. Prices hit a 52-week high of Rs 176.35 on the results but profit-booking on a weak day brought prices down to Rs 166 at the close. The stock should continue to do well in the short to medium term and it is a hedge against rising energy prices.
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