ONGC: Strong prospects after near-term worries

Worries over recovery of dues from Venezuela or HPCL buyout to be offset by strong earnings growth

Worries over recovery of past dues from the financial crisis-struck Venezuela has pushed down the share price of ONGC by almost 10 per cent from its recent highs of Rs 200 seen in early November. Although the risk does exist, analysts believe the concerns are overdone.

An analyst with a foreign brokerage pegs the maximum loss at $1.1 billion as against the fall in ONGC’s market capitalisation of about $3.5 billion this month. More importantly, the company’s fundamentals remain strong with oil and gas production improving after some disappointments in the past few years. 
 

Probal Sen at IDFC Securities says one per cent growth in oil output and an eight per cent increase in gas production for the September quarter (Q2) are precursors to what he believes will be stellar growth the ONGC group would see over four-five years in its output.

The company plans to double its natural gas output by 2022. Gas production grew by 4.3 per cent to 22.09 billion cubic metre (bcm) in FY17, its first increase in four years, and is now showing better traction in FY18. With this, analysts at Motilal Oswal Securities expect gas production to increase 10-15 per cent annually going ahead, led by completion of its development projects.
 

Further, gas realisations too are rising and bode well for ONGC’s earnings, as much of it will add to the bottom line. After the recent upward revision in administered prices of gas by 16-17 per cent to $2.89 per million British Thermal Units (mmbtu) for the six months starting October 1, market experts expect further increase in the next bi-annual review. Analysts at Jefferies say gas realisations have risen 16.5 per cent for the second half FY18 and should rise another 10-15 per cent within a year. Rising production together with higher gas prices has led them to increase their FY19-21 earnings estimates for ONGC by three-nine per cent. This translates to 16.8 per cent annual growth in earnings during FY18-21.
 

The bigger trigger is rising crude prices, given that oil accounts for a large share of ONGC’s consolidated revenues. Analysts believe the stock is currently pricing in crude below $50 a barrel levels, while Brent has continued to trade consistently above $50 levels in the past two months and is now close to $64 a barrel. An increase of $1 in oil prices can boost ONGC’s earnings per share by Rs 0.6; a $10 increase would prop up earnings by Rs 6 per share. 
 

Analysts at Motilal Oswal Securities, after the Q2 results, had said the rising crude oil prices, growth in oil and gas production, and declining operating expenditure (led by cost efficiencies) place ONGC on a strong footing. Sen at IDFC says the HPCL acquisition remains a near-term concern, but ONGC’s prospects remain attractive assuming 17 per cent compounded annual growth in earnings over FY17-20, with return on equity estimated to improve from 7-9 per cent over FY15-17 to 11 per cent by FY20. All these are keeping analysts bullish on the stock, which closed at Rs 181 on Friday.