Raising production, reviving existing fields can multiply gains for ONGC

Rising global oil and gas prices are already benefiting the oil major and its overseas subsidiary

India’s largest oil producer, ONGC, declared Q4 results reflecting the rise in global energy prices. The standalone results don’t take into account large subsidiaries such as OVL, HPCL, Petronet, and MRPL as well as several JVs and associates. While OVL is wholly-owned, ONGC’s majority shareholding in HPCL increased due to a buyback offer by the refining major.

On a consolidated basis, ONGC recorded revenue from operations of Rs 1.14 trillion in Q4 2020-21, which was 9.6 per cent higher than Rs 1.04 trillion a year ago. Profit before extraordinary items and tax was Rs 11,507 crore, versus a loss of Rs 1,652 crore YoY. The PAT was Rs 10,946 crore versus a loss of Rs 6,725 crore YoY.  

At consolidated level, the FY 2020-21 was disappointing in terms of revenues, due to the first half being hit by demand destruction and low prices. In FY 2020-21, ONGC recorded consolidated revenues of Rs 3.6 trillion versus Rs 4.25 trillion in FY 2019-20.

But the rise in prices through the second half allowed ONGC to record profit before tax and extraordinary items of Rs 29,190 crore versus PBT and extraordinary items of Rs 27,990 crore in the previous fiscal. The consolidated PAT was Rs 21,343 crore versus PAT of Rs 11,456 crore YoY, due to extraordinary write-offs of Rs 9,028 crore in FY 2019-20. Impairment reversal added about Rs 2,613 crore to the Q4, 2020-21 bottomline.

The cash-flow statement indicates operating profits before working capital changes was Rs 58,661 crore in 2020-21 versus Rs 67,907 crore YoY. In 2020-21, receivables mounted to Rs 6,666 crore, and inventories mounted to Rs 11,681 crore versus positive inflows on these heads in 2019-20. That’s a sign of stress in the economy. Net realisations increased 18.4 per cent to $58.05 a barrel in Q4, compared to $49.01 YoY, due to rising oil prices.

Investors must note ONGC is in effect, an end-to-end operation with footprints in exploration and production, refining and retail marketing. OVL contributed about Rs 13,154 crore of revenues in 2020-21. MRPL had Rs 50,992 crore in 2020-21 revenues, HPCL had Rs 273,221 crore in revenues (ONGC has 53.64 per cent stake in HPCL).

In that sense, ONGC is hedged though it paid a high price for the government-enforced HPCL takeover. When crude and gas prices are high, ONGC and OVL make higher profits; lower prices benefit HPCL and MRPL by boosting refining margins. HPCL has also benefited in the 2020-21 fiscal from positive revaluation of inventories, as prices have risen.

One key factor is the global commodity cycle, where crude and gas are in an uptrend. But ONGC needs to boost its production, which peaked in 2016-17, long before the pandemic. The company needs to revive existing fields and open up new fields as well. The market responded positively to the results. The stock is up 48 per cent in the last 12 months and securities analysts have “buy” calls.