ONGC's lower realisations, slow production ramp-up keep brokerages cautious

Though ONGC's Q2FY26 results met expectations, analysts remain cautious amid weaker crude realisations, delayed production ramp-up, and trimmed output guidance for FY26 and FY27

ONGC Q2FY26 performance was in line with consensus estimates. However, the long-awaited volume ramp up may have a longer timeline with volume guidance being cut. As a result, analysts are cutting earnings projections but the stock market is positive on the stock.

 

Management indicated that annual capex will continue to be in the range of ₹30,000-₹35,000 crore, while the FY26 and FY27 oil production guidance are updated to 19.8 million tonnes and 21 million tonnes, respectively, where FY26 is slightly below prior guidance. The gas production guidance of 20 billion cubic metres or bcm (FY26) is 5 per cent below guidance and 21.5 bcm (FY27) is maintained at earlier guidance.

 

The company will look to cut opex by ₹5,000 crore through cost optimisation measures. ONGC is ramping up renewables capacity with a target of 10 gigawatt (Gw) by 2030. Management hopes to raise Mumbai High production by around 60 per cent over 10 years given the BP TSP contract for Mumbai High, with peak production likely between FY28-30.

 

KG-98/2 gas production currently at 3 million standard cubic metres per day (mmscmd) should reach 10 mmscmd by July ’26, according to guidance. Gas volumes from Daman upside and DSF-II are guided at 5 mmscmd and 4 mmscmd, respectively, to be commissioned in FY26 second half and FY27. New well gas (NWG) share may reach 30-35 per cent in the next 3-4 years (currently less than 15 per cent), which implies gas revenues will climb sharply (NWG is priced at 20 per cent premium) unless policy on pricing changes.

 

In other positive news, the Mozambique force majeure may be lifted and that’s good for OVL, which has already invested ₹660 crore and is committed to 16-17 per cent share of total project finance of $16.1 billion.

 

Greater exploration intensity in India should have positive outcomes, but it may also lead to higher dry well write-offs, reducing near-term earnings. While crude realisations have dipped due to global trends, the downstream oil marketing major, HPCL, where ONGC is the majority shareholder, should have an upside on strong refining margins. This could somewhat offset weak crude realisations and some analysts are upgrading valuations for listed ONGC subsidiaries.

 

In Q2FY26, production stood at 9.97 million metric tonnes of oil equivalent (mmtoe), up 0.2 per cent Q-o-Q, and up 0.1 per cent Y-o-Y, which was 1.5 per cent below estimate. KG 98/2 is producing 28,000 barrels per day of oil and 3 mmscmd gas, while peak potential is reiterated at 45,000 barrels per day and 10 mmscmd by FY27. However, in the past few quarters, ONGC has struggled to raise production. Given delays and a muted H1FY26 performance, investors should be cautious.

 

The standalone Q2FY26 revenue was in line at ₹33,000 crore. The reported oil realisation was $67.3 per barrel or bbl, a $3.2/bbl discount to Brent in Q2.

 

Operating profit and net profit  were both in line. In the past 15-16 months, Brent crude has dropped by nearly 25 per cent.

 

Two unlisted subsidiaries, (ONGC Videsh) OVL and (ONGC Petro additions) OPaL, both continue to run in losses. OVL has a net loss of ₹350 crore compared with a loss of ₹110 crore in Q1FY26 and a profit of ₹330 crore in Q2FY25. OVL has improved oil sales volumes of 1.27mn tonnes, up 8 per cent Q-o-Q and 3 per cent Y-o-Y. But gas sales volumes of 404cm are down 6 per cent Q-o-Q and 24 per cent Y-o-Y.

 

OPaL’s reported net loss at ₹460 crore was better than a loss of ₹620 crore in Q1FY26, and loss of ₹640 crore in Q2FY25. Management expects OPaL to run at above 90 per cent capacity in H2FY26 and to generate positive operating profit in H2FY26. OPaL’s debt of ₹25,200 crore at an average 8.5 per cent interest rate is expected to be refinanced at around 7.5 per cent.

 

While the stock market response has been positive, analysts are cautious with some “neutral” and “reduce” recommendations due to the delays in production ramp up, and anticipation of lower crude and gas realisations.