ONGC: Coronavirus-led pressure on oil prices pulls down stock to 15-yr low

Concerns post a weak Q3 due to declining volumes and realisations coupled with government's stake sale plan were already weighing on investor sentiment

Shares of Oil and Natural Gas Corporation (ONGC), which were already on a declining trajectory having fallen 44 per cent since May highs, fell to a 15-year low on Tuesday. Concerns over decline in crude demand led by the spread of coronavirus and in turn fall in oil prices have further weakened Street sentiment, which had remained soft post the domestic oil and gas producing major’s muted December quarter (Q3) performance.

The December quarter had seen ONGC’s standalone revenues decline 14 per cent and net profit almost halve, on a year-on-year basis, due to weak crude and gas prices. The realisation from nominated oil blocks came at $59.73 a barrel, and was down 10 per cent year-on-year. What’s worse, the average Brent price was $62.5 per barrel in Q3, but has now slipped to $56.5 levels. And, this has raised concerns with respect to the company’s earnings.

The pressure on realisations comes at a time when the company’s oil and gas production too has failed to impress investors. While the company’s crude oil production declined by a per cent sequentially during Q3, output for the first nine months of FY20 is down 3 per cent. The company’s efforts to increase crude oil production have not yielded much result over the past few years. Analysts say that a large part of the production comes from age-old fields, and new fields have not been able to compensate.

The Street had also been looking forward to a ramp up in gas production to provide support. However, here too, the expectations have not been met. The company’s gas production during Q3 declined 8.4 per cent year-on-year, the steepest fall in many quarters. Though this decline is also attributed to civil disturbances in Assam, the first nine months’ gas production too was down 2.6 per cent. The uptick in gas production remains important to lift Street sentiment looking at the fact that gas prices remain soft. On gross calorific value (or GCV) basis, the December quarter, for instance, saw gas prices decline 3.9 per cent year-on-year to $3.23 per mmbtu (million British Thermal unit).  

Analysts at Centrum Broking, post December quarter results, had said that oil production now declining year-on-year for 9 successive quarters and gas production also declining for the last 2 quarters, the operational performance is expected to remain subdued for next 12-15 months, before recovering from FY22 as per latest estimates and company guidance.

The overhang of stake sale by the government over the years has continued to put pressure on PSU stocks like ONGC. “ONGC’s stock price has declined sharply because of weak Q3FY20 performance, declining oil & gas realisation and overhang of government’s stake sale,” says Abhijeet Bora at Sharekhan.

However, there are hopes of a revival in gas production from fields such as KG 98/2, which is likely to commence this month and could help arrest the declining output trend going forward. The production from such fields would also fetch premium domestic gas prices, which along with attractive valuation of 6.2x FY22 estimated EPS (44 per cent discount to its historical average one-year forward multiple) and high dividend yield of 6-7 per cent, keeps Bora constructive on ONGC.

However, if the pressure on oil prices continue, ONGC, which is predominantly a play on crude, would continue to see further decline in its share price.