Ukraine war-led spike in prices buoy Q4 performance of ONGC, Oil India

Reversal in price trends, policy measures such as windfall tax by the government and fall in refining margins are among key downside risks

PSU energy majors ONGC and Oil India (OIL) came out with their January-March quarter (Q4) results late last week. Given the excessive volatility through the last quarter and the steady rise in crude and gas prices before that, these were eagerly awaited. Although both companies delivered profitability gains, sequentially (QoQ) and year-on-year (YoY), ONGC disappointed because of higher-than-anticipated operating expenses and lower production. OIL, on the other hand, did well with higher production. Both producers benefited from the higher prices realised due to the rally caused by fears of supply disruptions after the start of the Ukraine war.

ONGC's Ebitda of Rs 16,050 crore was well below Street expectations of Rs 18,800-19,000 crore. The production decline was expected; production of both crude and natural gas has dropped sequentially for the past 10 quarters at least, and in the absence of new significant discoveries, this trend shall continue, given ageing fields. The rise in profits was driven purely by the sharp climb in fuel prices.

ONGC’s standalone operating profit and adjusted PAT stood at Rs 16,050 crore (up 97 per cent YoY and 8 per cent QoQ), and Rs 8,860 crore (up 115 per cent YoY and 1 per cent QoQ). Expenses spiked on the following accounts: The survey and dry-well expenses stood 29 per cent higher YoY and 127 per cent higher QoQ at Rs 2,540 crore, while the operating expense stood 17 per cent higher YoY and 35 per cent higher QoQ at Rs 5,400 crore. Apart from the natural decline in production caused by ageing fields, cyclone Tauktae affected western fields. OVL (ONGC Videsh; ONGC’s overseas subsidiary) saw a production decline during the quarter and reported an unadjusted loss of Rs 1,200 crore. After adjustment for exceptional items, revenue (Rs 4,436 crore), Ebitda (Rs 2,600 crore), and PAT (Rs 867 crore) saw sequential declines for OVL.

OIL reported Ebitda and PAT of Rs 1,940 crore and Rs 1,660 crore in Q4FY22, respectively, which were YoY gains of 465 per cent and 107 per cent. There was a surprising 53 per cent YoY decline in depreciation, depletion & amortisation (including exploration write-offs) for the quarter. The overall production data was encouraging, with total oil-plus-gas output rising 8 per cent YoY to 1.5 mt oil equivalent. The consolidated result includes NRL (Numaligarh Refinery) where OIL owns over 80 per cent stake.

Analysts expect some moderation in oil prices, maybe to a floor of $85 per barrel (Brent) from current levels of $116. But there's also a potential upside to prices if the Ukraine war continues. The key downside risks for both companies include a reversal in price trends, policy measures by the Government of India to cap profits, and dropping gross refining margins (GRMs) for subsidiaries Hindustan Petroleum Corporation and NRL, respectively. One rumour that has damaged sentiment is the thought that the government is considering a “windfall tax” on oil and gas production. It’s hard to assess the likelihood of this.

The ONGC stock has dropped around 6 per cent in the past three or four sessions. OIL has lost less ground. Analyst valuations of ONGC are centred around the Rs 150-mark, with the stock at Rs 143-144. Nomura has an outlying target of Rs 185. OIL is priced around Rs 225 and at least one sum-of-the-parts valuation assesses it is worth Rs 350.