ONGC: Good prospects

With crude oil realisations likely to be higher and gas prices tipped to rise, the outlook’s fairly bright.

It’s now three quarters in a row that ONGC has disappointed the Street. The March 2009 quarter numbers have come in below consensus estimates thanks to lower than anticipated production levels and higher than expected costs. Net sales were down 11 per cent year-on-year at Rs 13,834 with sales volumes lower by about 8 per cent year-on-year.

Besides, the net realised price for crude oil was lower at $43.4 per barrel compared with $49.7 per barrel in the March 2008 quarter. ONGC’s stand-alone profit after tax at Rs 2,200 crore is down 16 per cent year-on-year though there has been a one-time provisioning of Rs 880 crore for an arbitration dispute, pending the final decision.

Looking ahead, the company will benefit from the government’s reported move to increase the price of natural gas produced by ONGC from its nomination fields. The decision, analysts point out, could add around Rs 3 per share to ONGC’s consolidated earnings for 2009-10, currently estimated at Rs 100 for 2009-10. Also, industry watchers believe the government could consider freeing up gas pricing at some point.

Besides, should retail auto fuel prices be deregulated, ONGC may no longer need to compensate oil marketing firms for the shortfall they incur selling petrol and diesel though it may have to subsidise some losses on LPG and kerosene, prices of which are likely to be controlled. While these regulatory changes will result in a huge increase in profits for ONGC, the company has also announced several discoveries of oil which should ease concerns on the oil major’s being bale to replenish its reserves.

Analysts point out that in 2008-09, the stand-alone company made 28 discoveries. ONGC’s net realised crude price last year was $47.7 per barrel compared with nearly $53 in the previous year. With the average price of crude oil expected to be higher this year at around $60 per barrel and fair chance of an increase in gas prices, there is some upside to the stock. Since January, the ONGC stock has gained 54 per cent to the Sensex’s 46 per cent. Kotak Securities ascribes a fair value to the stock of Rs 1,100.