Production ramp-up, higher realisations expected to drive gains for ONGC

Upstream player ONGC has seen strong buying although 3QFY25 is expected to be flat

Global energy markets are experiencing weaker demand. The strong US dollar is also influencing crude and gas prices. Since Indian OMCs (oil marketing companies) have not reduced retail prices, they enjoy good retail margins, partly offset by inventory losses and weak gross refining margins.

 

Upstream player ONGC has seen strong buying although the third quarter of the current financial year (3QFY25) is expected to be flat. The PSU will generate higher volumes going forward. Crude oil prices may be more or less stable, with the Organisation of the Petroleum Exporting Countries (OPEC)-plus looking to hold a price band of $70-75 per barrel (bbl).  ONGC’s higher gas volumes will come at a 40 per cent premium to administered pricing mechanism (APM) due to being new well gas (NWG) or high pressure/high temperature (HPHT) gas.

 

 

ONGC may see production go up by around 12 per cent over the next three financial years (cumulative). In Q3FY25, net crude realisation adjusted for windfall tax may be lower by $1/bbl quarter-on-quarter (Q-o-Q) at $71-73/bbl (Brent averaged $74.7/bbl in Q3FY25 vs $80.3/bbl in Q2FY25). The removal of windfall tax is positive but impact is minimal in Q3FY25.

 

ONGC’s gas realisations may be a bit higher Q-o-Q. APM gas is capped at $6.5/mmbtu (metric million British thermal unit) but 5-7 per cent of APM gas (4.7 mmscmd, or million standard cubic meter per day, as per ONGC management guidance in Q2FY25) has been reclassified as NWG at $9/mmbtu. ONGC’s crude and gas volume may be up 1 per cent Q-o-Q due to gradual ramp-up of output from KG DW 98/2 fields.

 

The rupee depreciated 2.4 per cent during Q3FY25 (from Rs 83.7/$ to Rs 85.7/$). ONGC is a beneficiary since selling prices are US dollar-linked and cost is almost entirely rupee denominated (capex has a higher share of USD-denominated costs, especially for rigs).

 

Billing gas from new wells (of nominated blocks) started in September and currently, NWG is 4.68 mmscmd priced at 12 per cent of the Indian crude basket (40 per cent premium to APM). ONGC has awarded contracts for Daman Upside Development Project and offshore project under discovered small fields (DSF-2). These may add 5 mmsmcd and 4 mmscmd, respectively, to gas volumes from FY27. 

 

In Q2FY25, ONGC reported Ebitda (earnings before interest, taxes, depreciation and amortisation) at Rs 18,200 crore, flat Y-o-Y — lower production was offset by higher crude realisation (net of windfall tax). Q-o-Q gas production (excluding joint ventures) grew after 10 quarters of decline, due to partial ramp-up in KG-98/2. Further ramp-up in KG-98/2 volumes may lead to 6 per cent net profit growth across FY24-FY27, assuming 2-3 per cent of volume growth across FY24-FY27 and higher gas realisations.

 

In KG-98/2, oil production is at 25,000 barrels per day (bpd) and ONGC looks to ramp it up to 45,000 bpd by end-FY25. KG gas production may reach 10 mmscmd by end-FY25 (current 2 mmscmd). ONGC guided (end-Q2FY25) for 44.9 million tonnes of oil equivalent and 46.2 million tonnes of oil equivalent in FY26 and FY27, respectively. In FY26, oil production will be 22.8 million tonnes and gas will be 22.1 bcm (billion cubic meters).

 

Since KG-98/2 is under NELP (New Exploration Licensing Policy), windfall tax doesn’t apply. The gas has HPHT classification with price at $9-10/mmbtu. In new wells from older nominated blocks, ONGC will also enjoy a 40 per cent premium over APM. This has led to re-rating although EPS (early production system) may slide in FY25, and early FY26.

 

In the first half of the current financial year (H1FY25), ONGC’s capex of Rs 24,000 crore includes Rs 6,000 crore infusion in OPAL joint venture. ONGC guided for capex of Rs 34,000-36,000 crore per annum in FY26 and FY27. About 3.2 mmscmd of NWG is being supplied to OPAL for five years. OPAL’s capacity utilisation was 94 per cent in Q2FY25, with operating profit at Rs 78.7 crore, and net loss of Rs 637 crore. ONGC’s total investment of Rs 18,365 crore in OPAL will increase its stake to 95 per cent. OPAL is expected to register muted FY25 earnings but turnaround is expected in FY26. ONGC Videsh (OVL) has also guided for FY25 production at 10.5 mn tonnes of oil equivalent.

 

All this has led to a positive long-term re-rating though EPS estimates have been cut in FY25 by many analysts.