 "A technician opens a pressure gas valve inside the Oil and Natural Gas Corp (ONGC) group gathering station on the outskirts of Ahmedabad.")
With the Organization of the Petroleum Exporting Countries (Opec) agreeing to cut production, there could be more upside to crude oil prices, which are up about seven per cent this week. This has lent further strength to the Oil and Natural Gas Corporation (ONGC) stock. From lows of Rs 188 in February, when crude oil had tumbled to about $30 a barrel-levels, the stock has risen to Rs 257, with Brent crude oil now close to $50.
India’s fuel price reforms have also eased concerns on under-recoveries. More benefits can flow for oil producers and marketing companies if kerosene reforms are started and the recent monthly LPG price hike (Rs 2 per cylinder) are made permanent.
In this backdrop, ONGC’s earnings and stock price are expected to closely track oil prices, say analysts. Among other benefits, the company’s gas output is expected to increase by five per cent, with six development and three redevelopment projects even as oil production will largely be flat, say analysts at Edelweiss.
They add the KG offshore project will be viable at premium-pricing for difficult fields and the Vankor deal ($1.3 billion for a 15 per cent stake) will be accretive even at single-digit IRR (internal rate of return) as the borrowing cost is less than four per cent.
However, there are near-term risks to earnings growth. Recently, there was a strong buzz that ONGC will pick up stake in GSPL’s Deen Dayal Upadhyay block. ONGC, in its analysts’ call after results, had denied it. But, if it does acquire, it will not be taken well by the Street.
Analysts at Kotak Institutional Equities say they are cautious on the potential acquisition, given the uncertainty on future prospects of the block as pointed out by a recent CAG report (significant cost overruns and technical issues), though value creation or erosion for ONGC will depend on the acquisition price. Sachin Mehta at Centrum Broking also says with apparently no benefits, this will be a negative development though it remains to be seen if it materialises.
Also, with weak international gas prices, the government on Friday cut natural gas prices from the current $3.06 per million British thermal units (mBtu) for the period starting October 1 up to March 31, 2017 to $2.5 per mBtu. While on expected lines, the gas price cut will lead to lower revenues from the gas produced under administered pricing mechansim (old fields).India’s fuel price reforms have also eased concerns on under-recoveries. More benefits can flow for oil producers and marketing companies if kerosene reforms are started and the recent monthly LPG price hike (Rs 2 per cylinder) are made permanent.
In this backdrop, ONGC’s earnings and stock price are expected to closely track oil prices, say analysts. Among other benefits, the company’s gas output is expected to increase by five per cent, with six development and three redevelopment projects even as oil production will largely be flat, say analysts at Edelweiss.
They add the KG offshore project will be viable at premium-pricing for difficult fields and the Vankor deal ($1.3 billion for a 15 per cent stake) will be accretive even at single-digit IRR (internal rate of return) as the borrowing cost is less than four per cent.
However, there are near-term risks to earnings growth. Recently, there was a strong buzz that ONGC will pick up stake in GSPL’s Deen Dayal Upadhyay block. ONGC, in its analysts’ call after results, had denied it. But, if it does acquire, it will not be taken well by the Street.
Analysts at Kotak Institutional Equities say they are cautious on the potential acquisition, given the uncertainty on future prospects of the block as pointed out by a recent CAG report (significant cost overruns and technical issues), though value creation or erosion for ONGC will depend on the acquisition price. Sachin Mehta at Centrum Broking also says with apparently no benefits, this will be a negative development though it remains to be seen if it materialises.
Overall, analysts remain positive on ONGC while highlighting the near-term concerns on earnings. In a report this month, analysts at Edelweiss, who have target price of Rs 282, had said there will be risk to near-term earnings, as gas price is likely to be revised down 20 per cent for the second half of FY17. Emkay Global said the stock had moved up in tandem with an increase in crude oil price but due to lack of operational triggers; rise in oil price and cut in cess rate are the only triggers.
