ONGC slips up to 4% after reporting a first-ever loss in March quarter

Shares of Oil and Natural Gas Corporation (ONGC) slipped as much as 3.93 per cent to Rs 78.20 apiece on the BSE on Wednesday, a day after the state-run oil and gas company posted a pre-tax loss of Rs 10,529 crore in the fourth quarter of the financial year 2019-20 (Q4FY20). The loss was due to a drop in crude oil prices, the impact of the Covid-19-induced lockdown, and exchange losses. It was ONGC’s first-ever quarterly loss.

At 09:29 am, the stock was trading 1.6 per cent lower at Rs 80.10 on the BSE. In comparison, the S&P BSE Sensex was quoting 0.5 per cent higher at 35,099 levels. 

ONGC had logged a profit before tax (PBT) of Rs 11,691 crore in the corresponding period of FY19. The company’s revenue from operations declined by 7 per cent to Rs 104,489 crore in the period under review, compared to Rs 112,539 crore the previous year. CLICK HERE TO READ FULL REPORT

During the quarter under review, the company’s net realisation on crude was seen $49.01 a barrel, as against $61.93 a barrel a year ago. Gas price for the quarter was also lower at $3.23 per million metric British thermal unit (mmBtu), compared to $3.36 a mmBtu in the year-ago period.

Analysts at Motilal Oswal Financial Services (MOFSL), in an earnings review report, note that global lockdowns on account of Covid-19 led to huge demand destruction, which saw crude oil prices sink to historic lows. With the lifting of the lockdowns across the world, demand is again seeing an uptick. On the supply side, production cuts, both intentional (OPEC++) and unintentional (due to poor economies/bankruptcies) appear to be putting upward pressure on oil prices, they wrote.

"ONGC is expected to grow its gas production by nearly 12 per cent / 26 per cent to 27.9bcm/35.2bcm in FY21/FY22E. While no oil production growth is expected, ONGC’s efforts to arrest decline from age-old fields (accounting for 60–70 per cent of the total oil production) is commendable," the brokerage said. It has maintained a "Buy" rating on the stock with the target price of Rs 105.

"With oil out of the woods, we revert to discounted cash flow DCF-based fair value of ONGC’s oil & gas reserves from 10x FY21E earnings per share (EPS) earlier. Our DCF-based valuation, assuming Brent at US$40/bbl in FY21E, US$45/bbl in FY22E and long-term Brent at US$50/bbl, works out to Rs124/share (52% upside)," says ICICI Securities.

It further says that under the prevailing gas pricing formula (linked to gas prices in four countries of which three are net exporters), gas prices would be nearly US$2.2/mmbtu in FY21E. Deregulation of gas prices could improve investor sentiment in ONGC and boost its gas prices gradually to US$4/mmbtu or higher. The recent start of the gas trading exchange and the oil minister’s comments at the launch of the exchange is also expected to aid the company. 

Besides, a rise in oil prices would also be a share price driver, it says in its rating rationale. The brokerage has upgraded the stock to 'Buy' from 'Hold' with the target price of Rs 124.