At a time when international crude oil prices dropped by over 30 per cent in the last two months, a top executive of state-run Oil and Natural Gas Corporation (ONGC) said on Wednesday that a drop in oil rates is not a concern for the company as average crude oil prices for the current financial year would still remain over $65 a barrel.
This would ensure an increase in profit for the company during the financial year.
On Wednesday, the prices of Brent crude was seen at $56.6 a barrel, dipping sharply from the over $80 a barrel mark during the first week of October. The company’s director of finance Subhash Kumar told Business Standard that ONGC’s profit will still increase by at least Rs 40-50 billion this financial year.
This is because the average crude oil prices for the first six months of the year was high at $72 a barrel. This may ensure that the average prices for the year will also be high. For the financial year 2017-18, the average crude oil price was $55 a barrel. Meanwhile, the company’s board is set to take a decision on share buyback on Thursday. The company had reportedly informed the finance ministry that it would either buy back government shares in the company or pay an interim dividend. It was not keen on both as it needs time the build the corpus. “The board will take a call on this,” Kumar said.
According to a Mumbai-based analyst, the demand for crude oil is expected to decline and with Russia and Saudi Arabia pumping in more oil, prices are expected to further drop in the coming months. “It is believed that if there is a $1 increase in crude prices, it will increase our profits by around Rs 4 billion. If average prices are higher for the year, they will definitely push our profits up,” Kumar said. ONGC had posted a net profit of Rs 199.45 billion and going by Kumar’s estimates, the company’s net profit may cross Rs 240 billion for the financial year 2018-19.
For the ONGC group, one of the serious concerns is its consolidated debt that was seen at Rs 1.11 trillion in 2017-18 from Rs 556.19 billion in 2016-17. ONGC had paid a dividend of Rs 84.7 billion for the financial year 2017-18, compared to Rs 77.64 billion during the previous financial year. ONGC, Oil India and Indian Oil Corporation are the three oil companies that were identified by the department of investment and public asset management (Dipam) for buyback. Hence, for ONGC and OIL, a lot will depend on where the prices are headed in the coming year.
According to a Moody’s report, prices will settle to around $50-$70 a barrel by 2020, but they would witness volatility. ICRA, too, in its report stated that it expects to increase shale oil production in the US to weigh on the price of crude oil.
“Opec and Russia’s active management of supply through production cuts is expected to keep the prices of crude oil high. Accordingly, barring any geo-political shocks, prices of crude oil should hover in the region of $55-$75 a barrel,” the ICRA report added.