Higher realisations come as a boost to ONGC; volume growth may pick up

Improving realisations was the main factor responsible for ONGC’s better-than-expected performance in the June quarter, at both revenue and operating profit levels. 

And the trend is likely to remain positive, which is why analysts are positive on the company.

Reaping benefits of improving crude oil and natural gas prices, ONGC saw a strong jump in realisations. 

Its net realisation for oil at $74.2 a barrel rose 46 per cent, while gas realisation at $3.1 per mmbtu (million metric British thermal unit) was up 19 per cent, over the year-ago quarter. 

As a result, revenues jumped 43 per cent year-on-year (13.5 per cent sequentially), while operating profit surged 49 per cent year-on-year in the June quarter.

Volume growth, however, was tepid at three per cent for natural gas, while oil output was down four per cent. 

Although disappointing, analysts owe this softness to seasonally lower activity levels, but remain positive going forward. 

Edelweiss expects ONGC’s Rs 800 billion of projects under implementation to significantly revive gas production, which they estimate to grow at seven per cent annually from FY18 to FY22.

As rising volumes and realisations indicate strong prospects, the Street nearly ignored the rising interest and tax costs after the acquisition of Hindustan Petroleum Corporation (HPCL) which, along with lower other income, weighed on ONGC’s bottom-line. 

Therefore, net profit was lower than expected.

However, the worries would increase if ONGC is asked to bear the subsidy burden by the government in case oil prices surge from current levels. 

The ONGC stock had corrected by 17 per cent after the Union Budget until mid-July due to such concerns, even as oil prices were elevated. 

Nilesh Ghughe at HDFC Securities says that subsidy is the big imponderable and, at the same time, also believes that the current share price has factored in the worst-case scenario. 

Ghughe also said that with a price of $80, oil marketing companies could now comfortably pass on the inflation by raising prices of petrol/diesel, and thus, he does not see any under recovery on auto fuels. 

A recent forecast by a foreign brokerage projects the price of oil at $73, $68, $69 and $80 for FY19, FY20, FY21 and FY22, respectively. 

This essentially means that the risks on subsidy-sharing may be limited for the time being. 

It is not surprising then, that analysts’ target prices have indicated a 23-65 per cent upside for the ONGC stock.