Declining crude oil prices can hurt the prospects of state-owned Oil and Natural Gas Corporation (ONGC).
Both domestic and international businesses of the exploration and production company (housed under ONGC Videsh) may see a drop in realisations if crude oil price, which had hit its nine-month low earlier this week, stays below $45 a barrel, analysts said.
“With every one-dollar fall in crude oil prices, ONGC’s earnings will decline 4-5 per cent,” said Sudeep Anand, oil & gas analyst at IDBI Capital.
He expects the crude oil price to be around $52 a barrel this financial year and has not yet revised the FY18 earnings estimates of ONGC.
Most analysts peg crude oil prices to be anywhere between $50 and $57 for FY18. Thus, if crude oil stays at the current level for long, there could be some earnings downgrade for ONGC. So far in 2017, crude oil price has fallen 19 per cent and averaged at $52.5 per barrel.
However, ONGC’s woes extend beyond weakening crude oil prices.
For instance, a decline in organic production of oil. While the company registered a three per cent increase in its domestic gas production, oil production fell for both domestic and international businesses (excluding volumes from the Vankor buyout) in FY17. Between the two segments, oil is a more profitable business and hence it is crucial for ONGC to ramp up production in this segment. While the management expects gas production to improve 54 per cent between FY17 and FY20, its organic oil production is likely to be flat.
ONGC can use a weak crude oil price to buy exploration and production assets at cheap valuations globally, which could aid its production in the medium- to long-term. Inorganic growth will gain more importance. The company’s emphasis on driving cost efficiencies is another positive, particularly in a low crude oil price environment.
The ONGC stock has fallen 16 per cent in 2017 so far on weak crude oil prices and news reports suggesting a possible merger with a state-owned oil & gas entity.
At the current levels, the stock seems to capture most of the concerns. While a sharp fall in crude oil price is a key downside risk, news flow around any merger will also have a bearing on the stock price movement.
Overall, analysts remain positive on the company and their average target price per share of Rs 218 indicates an upside of 36 per cent from the current levels.
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