ONGC: Higher dry well write-offs hits Q1 profit

But it stands to gain from diesel deregulation, likely rise in domestic gas prices and higher production

Higher depreciation and amortisation on account of write-off of dry wells to the tune of Rs 3,830 crore, along with lower other income, impacted Oil and Natural Gas Corporation (ONGC)'s net profit in the June quarter. This more than eclipsed a 17 per cent year-on-year increase in net realisation to $47.2 per barrel.

For the quarter, revenues at Rs 21,851 crore (up 13.2 per cent year-on-year) were largely in-line with Bloomberg consensus estimate of Rs 21,841 crore. However, net profit at Rs 4,782 crore (up 19.1 per cent) missed the estimate of Rs 5,821 crore by 17.9 per cent. While it was mainly due to the exceptional items mentioned above, Edelweiss analysts say dry well write-offs tend to be lumpy and hence the sharp rise is not necessarily a trend.

Higher net realisation along with a weaker rupee aided top line growth of ONGC, even as production remained flat for both oil and natural gas. The rise in net realisation was led by higher gross realisation (up six per cent to $109 a barrel led by higher global oil prices) and flattish discount to oil marketing companies (down one per cent to $62 a barrel). In rupee terms, ONGC's subsidy burden was up five per cent at Rs 13,200 crore.

Notwithstanding the weak show, ONGC is set to gain from a host of regulatory measures and ramp-up in its own production as well as a gas price hike. Also, as Emkay Global’s analyst says, the oil ministry has proposed to raise net realisation from $52 per barrel to $65 a barrel, implying a lower subsidy share and higher profitability.

While its natural gas business will benefit from a likely upward revision in domestic gas prices, full diesel price deregulation will aid realisations. "We expect ONGC to benefit from a lower subsidy burden which we expect to decline to Rs 48,100/43,200 crore in FY15/FY16 compared to Rs 56,400 crore in FY14", says Sudeep Anand, analyst, IDBI Capital. Consequently, per-barrel net realisation is expected to improve to $52 in FY15 and $59 in FY16 versus $41 in FY14. Notably, every $1/mmbtu increase in domestic gas prices will increase ONGC's earnings per share by Rs 2.5, estimate analysts.

ONGC has also started production from some marginal fields which will aid higher production over the next two to three years. Analysts expect ONGC's crude oil production to increase 11.4 per cent to 35.1 million tonne per annum (mtpa) in FY16 from 31.5 mtpa in FY14. Natural gas production is also expected to improve 9.4 per cent to 30.4 billion cubic metres in the same period.

Not surprisingly, the stock was up two per cent to Rs 410 on Thursday (results came after market hours on Wednesday). And, most analysts remain positive on the stock.

Of the 27 analysts polled by Bloomberg this month, 23 have a Buy and three a Hold rating. Their average target price of Rs 457 indicates an upside of 11 per cent.