At current crude oil levels, correction could turn ONGC attractive

The US EIA forecasts Brent crude prices to average $74 per barrel in CY25, down 8 per cent Y-o-Y and to decline to $66 per barrel in CY26

Oil stocks have dropped around the world after Opec Plus said it was raising production. Demand for crude and gas is being negatively impacted by fears that the Trump tariff policy will reduce growth. Hence traders are seeing a situation where supply could increase when demand is reducing.

 

The US EIA forecasts Brent crude prices to average $74 per barrel in calendar year 2025 (CY25), down 8 per cent year-on-year (Y-o-Y) and to decline to $66 per barrel in CY26. Global oil production will rise faster than oil demand through this period. Global inventories will increase by an average of 0.9 million barrels per day in H2CY25 and by 1 million barrels a day CY26.

 

While this may be a relief for downstream players, it puts pressure on ONGC and Oil India and Reliance Industries. ONGC’s third quarter financial year 2025 (Q3FY25) standalone operating profit at ₹19,000 crore was higher than consensus due to better net crude realisation at $73 per barrel and slightly higher gas sales volume and realisation though this was partly offset by higher opex at ₹ 6,670 crore.

 

The management said KG DW 98/2 crude output has reached 35,000 barrels per day. ONGC’s standalone net profit at ₹8,240 crore, was lower than consensus due to lower other income and higher dry well write-off and depreciation.

 

OVL’s production continued to be weak while Q-o-Q decline in gas sales volume along with higher interest cost & depreciation and lower other income turned net profit negative in Q3FY25.

 

If EIA projections hold with OPEC+ continuing to support crude at $70-75/barrel, ONGC could do well enough. It’s likely to see 10-15 per cent output growth with higher output from KG DW 98/2 block. 

 

ONGC’s standalone net profit at ₹8,240 crore was lower than consensus due to lower other income of ₹1,810 crore and higher dry well write-off at ₹1,930 crore (₹1,210 crore in Q2FY25), and higher depreciation at ₹6,780 crore. The standalone Q3FY25 earnings per share is ₹6.5/share, while 9MFY25 EPS is ₹23.2/share.

 

Consolidated operating profit for Q3FY25 was ₹26,600 crore with consolidated net profit at ₹8,620 crore (EPS of ₹6.9/share). The consolidated 9MFY25 EPS is ₹23/share.

 

The second interim dividend of ₹5/share in Q3FY25 takes the total dividend to ₹11/share for 9MFY25. This is roughly 48 per cent payout of 9MFY25 standalone EPS of ₹23.2.

 

In Q3FY25, domestic crude sales volume was largely in line at 4.6 million metric tonnes or mmt (up 1.2 per cent Q-o-Q but down 1.6 per cent Y-o-Y) with crude production at 5.2 million metric tonne (up 1.5 per cent Q-o-Q and up 0.3 per cent Y-o-Y). Gross crude realisation was at $73.1 per barrel and net realisation, adjusted for marginal windfall tax of $0.1per barrel, was at $73 per bbl.

 

Gas sales volume was at 3.9 billion cubic metres (up 1.1 per cent Q-o-Q but down 1.2 per cent Y-o-Y) and overall gas realisation was at $7.4/metric million British thermal unit or mmbtu ($7.1/mmbtu in Q2FY25).

 

Management said gas price for production from new wells is $8.93/mmbtu during Q3FY25, based on 12 per cent of India’s crude basket. It also said five oil wells of P-field of deep-water block KG-DWN-98/2 were opened on December 16, 2024, enhancing total oil production to 35,000 barrels per day from 13 wells of cluster-II. KG DW 98/2 crude production will reach peak level of 45,000 barrels per day by end-Q4FY25 while KG DW 98/2 gas production will reach peak level of 10 mmcmd by end-FY25 or early FY26.

 

In Q3FY25, OVL’s crude output was down 1 per cent Q-o-Q to 1.8mmt (much lower than quarterly run-rate of 2mmt in FY22 pre-Ukraine invasion) while crude sales volume was flat Q-o-Q at 1.2mmt. Gas output recovered 9.6 per cent Q-o-Q to 0.8bcm while sales volume was down by 45.9 per cent Q-o-Q at 0.3bcm. Hence, OVL’s operating profit declined by 25 per cent Q-o-Q to ₹870 crore (vs. ₹1,150 crore in Q2FY25). Net profit was negative Rs 420 crore in Q3FY25 (vs. positive Rs 330 crore in Q2FY25).

 

If the assumptions of Brent at $70-75 hold, ONGC may be available at attractive valuation after correction.