Crude oil price drop likely to result in earnings downgrade for ONGC

Crude oil production was flat quarter-on-quarter (Q-o-Q) and year-on-year (Y-o-Y), while gas production was flat Q-o-Q but declined 6 per cent Y-o-Y

ONGC’s revenue for the fourth quarter of 2024-25 (Q4FY25) came in above estimates as crude oil and gas sales were higher than consensus. The revenue came in at ₹35,000 crore on the back of higher crude and gas sales and steady value added product sales. Oil realisation averaged $73.7 per barrel, a $3.1 per barrel discount to Brent.

 

Crude production was flat quarter-on-quarter (Q-o-Q) and flat year-on-year (Y-o-Y), while gas production was flat Q-o-Q but down 6 per cent Y-o-Y. The Ebitdax (Earnings before interest, depreciation, amortisation, and exploration) was at ₹19,000 crore (up 9 per cent Y-o-Y), while net profit of ₹6,450 crore was 22 per cent down Y-o-Y due to dry well write-offs, and survey costs, along with lower other income. There was also a forex gain of ₹13 crore.

 

In FY25, ONGC’s net sales were flat Y-o-Y and operating profit was flat Y-o-Y but net profit was down 11 per cent Y-o-Y. The board recommended a final dividend of ₹1.25 per share (total dividend for FY25 at ₹12.25 per share). ONGC dug a record 109 exploratory and 469 development wells in FY25. ONGC will incur a capex of ₹30,000-35,000 crore in FY26. In FY25, ₹10,300 crore was spent on exploration and production.

 

Right now, new well gas is 20 per cent of total gas sales. While additional revenue from new well gas was at ₹700 cr in FY25, it is expected to grow by 10-15 per cent every year. In 5-6 years, all gas will be new well gas with additional revenue from this at ₹1,500-2,000 crore. 

 

ONGC has guided for a crude oil production of 21.5 million metric tonnes of oil equivalent or mmtoe and gas production of 21 mmtoe in FY26, driven by production from the KG 98/2 asset, Daman upside development, and monetisation of stranded gas reserves.

 

ONGC Videsh or OVL’s oil production was flat Y-o-Y at 1.79 million metric tonnes or mmt, while gas production was 0.8 billion cubic metres or bcm (down 5 per cent Y-o-Y). Crude oil sales stood at 1.18mmt (marginally down Y-o-Y), while gas sales came in at 0.39 bcm (down 12 per cent Y-o-Y). OVL’s revenue was ₹3,030 crore (similar Y-o-Y), and profit before depreciation and tax stood at ₹1,260 crore (down 35 per cent Y-o-Y). OVL says Mozambique will deliver gas in the next three years and production has started in Columbia and Azerbaijan.

 

The ONGC FY26 capex plan will be about ₹30,000-35,000 crore. In FY25, capex of ₹38,000 crore was toward conventional business with ₹10,300 crore (up 25 per cent Y-o-Y) of capex toward exploration. Around ₹18,000 crore was infused in ONGC Petro additions or OPaL.

 

From Q1FY26, OPaL is expected to have a good performance with input new well gas available at $8/million British thermal unit. It is on the verge of closing all ethane sourcing contracts from CY28. Around 60 per cent naphtha and 40 per cent ethane are being consumed. From April ’25, there will be 8-9 per cent savings as OPaL shall not pay customs duty after exiting the SEZ.

 

ONGC sees Daman upside coming online in Q4FY26 with initial flow of 5 million metric standard cubic meters per day (mmscmd) gas, while KG-98/2 will ramp up in FY27. In KG-98/2, the current production is oil at  33-34,000 barrels per day and it can ramp to 45,000 barrels per day. Current gas production is 2.75 mmscmd which will ramp to 6mmscmd initially and then to 10mmscmd. There could be big developments in the LNG downstream business and ONGC is also considering investing in vessels and rigs. It has increased renewable energy capacity from 192MW to 2.5GW (target is 10GW).

 

The stock price has been flat, due to a downtrend in oil price. Production from standalone operated fields was up 3 per cent Y-o-Y. ONGC plans to increase reserve recovery by 60 per cent from its flagship Mumbai High field, which would aid growth beyond FY27.

 

The administered price mechanism (APM) gas price would rise by $0.25/mmbtu each year until FY27, according to the Kirit Parekh Committee report. But a near-term dip in crude oil price may lead to earnings downgrades. Looking beyond the short term, there would be production growth over 3-4 years and possible improvement in OPal and OVL, which could be positive factors.