Falling crude oil production, low global crude prices, worries about the subsidy burden, debt exposure on the HPCL buyout were among the many reasons that kept Oil and Natural Gas Corporation’s (ONGC) stock down over the years.
Analysts didn’t take the debt it took on to buy out HPCL lightly, and this came over and above the special dividends the company was forced to give over the years to make up for the government’s fiscal deficit.
But, after the fourth quarter results announcement, quite a few brokerages have come out with a buy recommendation for ONGC. “... concerns over lack of crude oil production growth still persist. However, we expect re-rating of ONGC as fears of subsidy burden have allayed. Adjusting for its investments (OVL+ other) the stock is trading at 6.8x FY21E standalone EPS,” said HDFC Securities.
ONGC has also regained its status as the most profitable PSU after two years, clocking its highest ever net profit of Rs 26,716 crore for the financial year 2018-19, up 33.9 per cent year-on-year. Revenue rose 29 per cent to its highest ever of Rs 1,09,655 crore.
Net oil price realization per barrel improved to $68.19 from $55.19 in the previous year, though the fourth quarter realization was at $64.27. Gas prices increased too, from $2.69/mmbtu in FY18 to $3.21 in FY19. Crude oil production was down 5 per cent in Q4 at 4.79 MMT, and for the full year, down 5.9 per cent at 19.63 MMT. But, gas production has risen 8.2 per cent during Q4 and and 5.4 per cent for FY19.
JM Financial, which has put a “Hold” on the stock with price target of Rs 185, said that at the recent analyst meet ONGC indicated that gas production could continue to grow at the growth rate achieved over the last 2 years: around 5-7 per cent.
ONGC is betting on the new discoveries from the east coast to boost gas production, but natural gas will contribute heavily to ONGC profitability for the near term, Moody’s Investors Service said. Unlike oil, gas prices are still fixed periodically by the government according to a set formula. Oil price realisation would stay close to global oil prices as long as ONGC is not mandated to share higher subsidy burden.
“We maintain our estimates for FY20/21E as we maintain net realization at US$60/bbl. We reiterate our positive stance as we expect crude oil prices to remain range bound at current levels, which will alleviate the need for subsidies,” Prabhudas Lilladher said.
Subsidy worries have subsided for now with government promising subsidy payments out of its pocket after budgeting for only Rs 24,800 crore last year. ONGC’s debt is also down to Rs 21,500 crore from Rs 25,592 crore a year ago.