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Oil and Natural Gas Corporation (ONGC)’s scrip has under-performed the benchmark BSE Sensex in the past year. Concerns over falling crude oil prices and a continued ad hoc subsidy sharing between the government and upstream companies have weighed.
Weak crude oil prices impact realisations of ONGC’s oil production from domestic and foreign fields (part of ONGC Videsh). However, the impact is higher for ONGC Videsh which witnesses Rs 0.45 earning per share (EPS) reduction for every dollar of decline in crude oil price. For ONGC, the impact of lower crude oil prices has to be assessed along with subsidy outgo.
While weak crude oil prices reduce its gross realisations, the total under-recovery and consequently subsidy burden, too, reduces. This means, the impact of weak crude oil prices is partly offset by lower subsidies, which in turn supports ONGC’s net realisations. However, the ratio of subsidy sharing between the government and upstream companies determines the actual impact and is, thus, crucial.
Crude oil has dropped from $97.5 a barrel in September to $49 per barrel. According to analyst estimates, exploration and development activities are feasible for ONGC only till it earns net realisation of $30 a barrel or more.
Most analysts expect crude oil prices to improve. Notably, the Organization of Petroleum Exporting Countries (Opec) cuts production to push price, following a steep drop, though it has not happened this time. However, analysts expect others such as Canada and Russia to cut production, which might act as a catalyst for crude oil. This along with easing under-recoveries, given the gradual diesel price deregulation and government reforms to restrict subsidies on cooking fuel, will rub off favourably on ONGC.
Assuming upstream companies such as ONGC, GAIL and Oil India contribute 50 per cent of the total under-recoveries, analysts at Elara Capital expect ONGC’s post-subsidy net realisation to improve from $ 41 a barrel in FY14 to $52.1 a barrel in FY15 and $59.5 a barrel in FY16.
Overall, most analysts remain optimistic on ONGC and believe the current weakness offers a good entry point. The average Bloomberg consensus target price is pegged at Rs 431, implying upside potential of 28 per cent from Wednesday’s closing price.
