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Published on 18/11/2019 8:45:43 AM | Source: Live Mint

ONGC production disappoints in Q2; higher crude oil prices are key

MUMBAI : State-run oil and gas producer Oil and Natural Gas Corp. Ltd’s (ONGC’s) September quarter results did not impress the Street. Even as the company’s stand-alone net profit of ₹6,263 crore was in line with the estimates of a Bloomberg poll of analysts, there were some disappointing factors.

Stand-alone net crude oil price realizations declined by 17% year-on-year to $60.33 a barrel, disappointing some analysts. Crude oil realization was lower sequentially as well, declining by 9%. Moreover, production performance was rather discouraging. ONGC’s total crude oil and gas production declined 4% and 2%, respectively, on a year-on-year basis. “Oil production has seen year-on-year decline in successive eight quarters while this is the first decline seen in gas production in 13 quarters," said analysts at Centrum Broking Ltd in a report on 15 November.

On a consolidated basis, “production is unlikely to rebound soon, ONGC’s optimism notwithstanding, but we were more disappointed by the weak consolidated earnings", said analysts at Jefferies India Pvt. Ltd in a report on 14 November. Consolidated performance includes the financials of ONGC’s subsidiaries, and associates and joint ventures. The downstream ventures (HPCL, MRPL, OPaL, OMPL) were expectedly weak, but so was ONGC Videsh Ltd, which saw net profit decline 76% compared to the June quarter, pointed out Jefferies India.

Post-results, the company’s shares declined by 0.5% on the National Stock Exchange on Friday—a day when the broader markets were marginally up. In any case, investors haven’t had much luck with the stock. While the stock has recovered from its 52-week low seen on 4 September, it has declined by 15% so far this fiscal year.

For the half-year ended September, ONGC’s crude oil production declined by 4.7%, while gas production increased marginally by 1%, year-on-year. Needless to say, recovery on the production front remains crucial. In general, for oil producers, a higher crude oil price is helpful to ensure higher realizations. Additionally, investors would do well to keep a tab on news flow and developments on gas price reforms.

Meanwhile, it is comforting that valuations are not demanding. Currently, the ONGC stock trades at about six times estimated earnings for FY20, according to Bloomberg data. “ONGC is cheap mainly due to lack of positive triggers and stock overhang due to possible GoI divestment by way of ETF," said ICICI Securities Ltd analysts, commenting on valuations. ONGC’s share price discounts long-term oil realization of just $31 per barrel, added ICICI Securities in a report on 15 November.