Volatility in crude prices fuels ONGC, Oil India concerns

Lack of production growth in both oil, gas keeping analysts cautious

Concerns for oil and gas upstream producers in India, such as ONGC, have risen owing to the slide in crude oil prices to below the $40-mark on Wednesday, from above $45 on September 1.

ONGC shares are trading about 10 per cent lower in September, while Oil India has also dipped.

The rebound in oil prices — to $42-45 levels in recent days from the lows of $20 a barrel in March — had led to an improvement in Street sentiment, following which the ONGC stock gained up to 36 per cent as of August compared to its March lows. However, for further upside in the stock, it is necessary that oil prices firm up again.

ONGC has already seen its net crude oil realisation per barrel slip from $60 in the December 2019 quarter to $49 in the March 2020 quarter and further to $29 in the June 2020 quarter. The fresh volatility in oil prices has dashed hopes of any recovery. ONGC’S crude oil production is also likely to remain little changed. Analysts estimate the same at 23.6 million metric tonnes (mmt) for FY21, against the 23.4 mmt recorded in FY20.

In the gas business, too, the Street was optimistic on recovery in production. However, the Covid-19 pandemic has delayed its ramp up.

Though gas production may record significant growth over the next 3-4 years, analysts at Motilal Oswal Securities have, for now, revised their gas production estimates, factoring in the delays.

They have lowered projections by 8-14 per cent for FY21 and FY22, to 24.7 bcm (billion cubic meters) and 30.2 bcm, respectively.

Further, ONGC’S gas realisation had come in at $2.4 per mmbtu (million British Thermal units) — down 28 per cent sequentially in the June quarter — on account of the sharp 26 per cent cut in domestic gas prices from April 1, 2020.

Domestic gas prices are likely to fall further; Nomura pegs it at $1.9-2.0 per mmbtu from October 1, 2020.

The story is no different for Oil India. For the June quarter, its crude oil realisation fell 42 per cent sequentially and 54 per cent year-on-year (YOY) to $29.3 a barrel, whereas gas realisation fell 26 per cent sequentially and 35 per cent YOY to $2.3 per mmbtu, at the standalone level.

Lack of production growth in both oil and gas is a key reason for analysts remaining cautious on Oil India.

Consequently, earnings for both ONGC and Oil India hinge on an uptick in crude oil prices, which otherwise are expected to be under pressure during FY21.

Given the weak global macros, analysts at HDFC Securities have estimated oil prices at $36 in FY21, and $41 in FY22, against $63 a barrel in FY20. As a result, they have reduced their ratings for both stocks. Even Nomura remains cautious on the ONGC stock.