Limited gains for ONGC as coronavirus crisis, oil price spat continue

Analysts feel company's stock is already discounting crude price recovering to $48/barrel.

State-owned ONGC gained more than 34 per cent from March lows to correct on Wednesday. As crude oil prices improved from $19 a barrel in April to around $40, sentiment for ONGC improved but the company’s March quarter performance failed to impress the investors.

The lower oil and gas realisations, sharp jump in operating expenses, higher than expected DD&A (depletions, depreciation & amortization) expenses and impairments caused by the coronavirus outbreak hurt the company’s earnings.

The company’s crude realisations at $49 a barrel during the March quarter were 20.9 per cent lower year-on-year  ($61.93 a barrel during year-ago  quarter). The gas prices at $3.23 per mmmbtu (metric million British thermal unit) too were lower by about 4 per cent year-on-year.

ONGC’s crude production at 4935 MMT (Million Metric tonne) improved slightly ,by 3 per cent year-on-year, but gas production declined 6.6 per cent year-on-year.

Thus with sharp fall in crude realisations not surprising the company’s March quarter standalone sales (Rs 21,456 crore)declined almost 20 per cent year-on-year.

As the realisations declined, the rising other expenses ( up 11 per cent year-on-year) pulled down the earnings before interest tax depreciation and amortisation (Ebitda), which at Rs 8588 crore declined 30.6 per cent year-on-year. However analysts say that adjusting for the Rs 1,110 crore exchange loss and Ind-AS 116 related adjustments of about Rs 370 crore, the company’s Ebitda would have come at Rs 10,100 crore (down 18.5 per cent).

DD&A at Rs 8037 crore too came slightly higher than analyst expectations of Rs 6800-7000 crore while other incomes declined by 41 per cent. This meant that pre-tax profits at Rs 1007 crore were down 82 per cent year-on-year. The company however recognised an Exceptional Item towards impairment loss of Rs. 4,899 crore in Q4 FY’20 to factor into estimated future crude oil and natural gas prices. Thus company reported a net loss of Rs 3098 crore.

While the company’s crude realisations had declined almost 21 per cent in March quarter , analysts expect them to be further lower in the June quarter. For FY21 analysts are factoring average Brent crude price at $40 a barrel; compared to Brent averaging $61 a barrel during FY20. Gas prices have fallen sharply and gas prices estimated at an average of $2.8 per mmbtu for Fy21 is much lower than $3.8 per mmbtu in FY21. Clearly, the lower realisations will weigh on net realisations and in turn earnings.

On production front while analysts at Motilal Oswal financial services expect ONGC’s  gas production to grow by 12 per cent in Fy21 to 27.9 BCM, and further 26 per cent to 35.2BCM in FY22, however  the Crude production is expected to remain at similar levels. Not surprising analysts are expecting earnings decline in Fy21.

Analysts at Edelweiss say that they remain cautious on FY21 demand outlook, bearing in mind the coronavirus crisis and the Saudi-Russia uncertainty on crude production cuts. Analysts at Kotak Institutional equities feel that the stock is already discounting crude price recovering to $48/barrel.