Higher oil prices lift ONGC Q1, output growth remains crucial for rerating

Higher crude realisations lifted ONGC's Q1 earnings above estimates, but sustained oil and gas production growth remains the key catalyst for any meaningful stock rerating

ONGC's oil and gas volumes (including joint venture, or JV, production) met consensus at 5.0 million metric tonnes (mmt) and 4.9 billion cubic metres (bcm), respectively. Crude realisation was higher at $99.5 per barrel. Revenue at ₹46,460 crore was up 29.3 per cent quarter-on-quarter (Q-o-Q) and 45.2 per cent year-on-year (Y-o-Y). Earnings before interest, tax, depreciation and amortisation (EBITDA) of ₹29,450 crore was up 65.7 per cent Q-o-Q and 57.9 per cent Y-o-Y. Net profit of ₹17,030 crore also beat estimates. The forex loss was ₹230 crore. Provisions and write-offs stood at ₹630 crore in Q1FY27. Production estimates for FY27 and FY28 have been cut.

 

Oil production from own fields declined 5.0 per cent Y-o-Y (flat Q-o-Q) to 4.7 mmt. Share of oil JVs stood at 0.3 mmt, down 3.0 per cent Q-o-Q and 14.4 per cent Y-o-Y. Gas production from own fields was 4.8 bcm, flat Q-o-Q and down 1.9 per cent Y-o-Y. Gas production from JVs stood at 0.1 bcm, down 2.1 per cent Q-o-Q and 18.8 per cent Y-o-Y. Total oil and gas production (including JVs) was flat Q-o-Q at 5.0 mmt and 4.9 bcm, respectively, and down 5.5 per cent and 2.3 per cent Y-o-Y, respectively. For ONGC Videsh Ltd (OVL), oil volumes improved 2.6 per cent Y-o-Y to 1.8 mmt, but gas production declined 2.4 per cent Y-o-Y to 0.7 bcm. ONGC made two discoveries during Q1FY27, with one offshore prospect and one onshore discovery.

 

Crude realisation from own fields improved to $99.5 per barrel versus $78.3 per barrel Q-o-Q and $66.1 per barrel in Q1FY26. Gas price realisation for own fields was $7.0 per million British thermal units (mmBtu) versus $6.4 Q-o-Q and $6.8 per mmBtu in Q1FY26. Net profit was higher due to lower interest costs, and lower survey and exploratory costs. Gas contribution to revenue rose from 25 per cent in FY12 to 28 per cent in FY26. Management expects the contribution to increase further with the ramp-up of new gas projects. The production decline was attributed to Y-o-Y production variation and temporary operational issues at KG-DWN-98/2.

 

Following positive TSP-1 results, ONGC expanded its partnership with BP and is investing heavily in the Western Offshore, with projects exceeding ₹40,000 crore under implementation. Mumbai High is producing at 107 per cent of the contractual oil baseline and 113 per cent of the gas baseline. The standalone oil and gas production guidance is 39 mmt for FY27 and 40 mmt in FY28. FY27 capital expenditure (capex) is estimated at $3.5-4.0 billion, with Mahanadi deepwater exploration wells expected to cost ₹800-1,000 crore each, with drilling results available around three months after spudding. Exploration capex will increase with Samudra Manthan. Incremental gas volumes of 2 million standard cubic metres per day (mmscmd) by December 2026 are expected on the back of East Coast CP commissioning (1.3 mmscmd), Tapti & Daman (0.5 mmscmd) and gains from technical service provider (TSP)-1 and TSP-2. Management expects 1 million metric tonnes of oil equivalent (mmtoe) of incremental production in FY28, while NELP assets witness a natural decline of 8 per cent. At KG-DWN-98/2, all 13 oil wells are operational and four of the seven gas wells are producing, while the remaining three are to be connected.

 

Oil production at KG-DWN-98/2 is being affected by reservoir complexity and connectivity. ONGC is working with technical experts to optimise reservoir development and production. The Samudra Manthan programme envisages drilling 100 deepwater exploratory wells, with Phase I to be completed by FY31. Management expects government support and said ONGC will participate aggressively in OALP-X.

 

For OVL, the Sakhalin asset is under ONGC's control and should support a return to profitability. Mozambique is expected to commence production in CY28/CY29 with initial LNG production of 3 million tonnes per annum (MMTPA). Survey activity is expected to pick up after the monsoon, with a sharp increase in exploration costs in H2FY27.

 

New well gas contribution increased, with volume share rising to 24 per cent in Q1FY27 (versus 17 per cent in FY26), and now contributes 38 per cent of nomination gas revenue, generating ₹4,000 crore in Q1FY27 (Rs 1,900 crore of incremental realisation over the administered price mechanism, or APM). OVL reported net profit of ₹2,940 crore in the last two quarters versus ₹1,220 crore in FY26. Production from Sakhalin-1 since January 2026 has driven OVL's performance.

 

OPaL's performance weakened in Q1FY27, reporting a loss of ₹610 crore (loss of ₹70 crore in Q4FY26), with capacity utilisation declining to 75 per cent (93 per cent in Q4FY26). Performance was impacted by higher feedstock costs.

 

The higher realisation offset weak production, but oil and gas sales were meaningfully below estimates. Investors have now been waiting for production volumes to improve for the last several quarters. That is disappointing, but the valuation is tricky. Given the value of investments held on the balance sheet and the OVL valuation, the implied valuation of production seems to assume a Brent crude price of $65 per barrel. So there could be upside.