ONGC: Ready to break production barriers

A look at Oil and Natural Gas Corporation’s (ONGC’s) 2016-17 annual report gives confidence about the company’s oil and gas production outlook. Production, apart from benign prices, has been a key bane for investors. Now both are on the mend.


The latest annual report suggests drilling performance improved significantly in FY17, with 501 wells drilled, the highest-ever. The drilling efficiency, in terms of metres drilled per rig-month, improved 25 per cent. The results are evident now; analysts at Credit Suisse say higher well completions have driven output, with oil & gas production run-rates now up 3/13 per cent versus the first half of FY17.


These improvements are led by an increase in capital allocation, wherein development capex is up from 25 per cent (of total) over FY14-16 to 35 per cent, thereby highlighting ONGC's renewed focus on development drilling, say analysts.


There are clear signs of production increase. ONGC said it had reversed the declining crude oil production trend. The onshore crude production had increased to 5.97 million tonnes (mt) in FY17 (5.83 mt in FY16). The June quarter has seen production from nominated fields increase by 2.7 per cent over a year.


The domestic gas production, which registered an increase of 4.3 per cent during FY17, was the first increase in four years. Improving on the same, the June quarter has seen gas output from nominated blocks rise 10.8 per cent over a year. Analysts at Elara Capital say new supplies would come from Daman, Vashishtha, Bassein, Kaveri, Tripura and joint ventures, and the ONGC management’s forecast of 16 per cent over a gas supply increase during FY19 is in line with their expectations.


Motilal Oswal Securities, too, expect 10-15 per cent annual increase in gas production. Elara has given ‘outperform’ ratings for the ONGC stock, on the back of rising gas production, increase in gas prices and control in operating expenses.


Amongst its subsidiaries, Kotak Securities expects MRPL’s profitability to rise on account of improved product mix, better refining margins, economies of scale, forward integration (polypropylene plant), besides various tax benefits. This bodes well for ONGC’s consolidated performance.


All this should boost investor confidence in ONGC, which has been an underperformer for long. Volatility in crude oil prices and overhang of acquisitions of HPCL are some concerns. With these now priced in, benefits of increasing gas production, continued fuel pricing reforms and some increase in administered price of gas (in six monthly review soon) can lead to improved earnings and investor sentiments.


Analysts at Credit Suisse recently have upgraded their EPS estimates for FY18 and FY19 for ONGC by four and three per cent, respectively, on higher volumes, and remain positive due to robust volume momentum, continued subsidy reduction and 30 per cent gas price increase.


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