Street gives thumbs up to ONGC even as stake sale remains a challenge

Topics ONGC | ONGC sell stake

The ONGC stock, which fell to a 52-week low on Wednesday, has seen some gain thereafter. Falling crude and gas prices is not good news for India’s largest oil producer, even though analysts don’t see much impact of the fire incident at the Uran plant on gas sales in the second quarter. 

Declining global crude oil prices are likely to lead to lower net realisations for ONGC’s crude business, while falling gas prices may also affect future earnings. As a consequence, the stock is down 29 per cent since its May highs.

Brent crude, which stood at $74-75 a barrel in April, continued to decline to $57 during August and is now at $60-61. Brent crude oil price averaged at $74.5 a barrel in the June quarter (up 11 per cent sequentially) and hence, ONGC saw its net crude realisation (ex-VAT/CST) average at $66.3 a barrel (up 7 per cent sequentially), according to analyst calculations. 

With Brent now trading lower, ONGC’s realisations are expected to decline in the September quarter. Analysts at Jefferies have lowered their Brent forecasts for H2FY20 to $58-60 a barrel, amid softer demand/supply outlook. 

This is not good news for ONGC, which is seeing pressure on oil production. ONGC’s crude oil output slipped for the sixth quarter in a row and was 4.7 per cent lower at 5.14 million tonnes (mt) during June quarter, on a year-on-year (YoY) basis, although the extent of decline was lower than the previous three quarters, said analysts. 

The company’s efforts on arresting this decline are paying off. However, the expectation for FY20 is of flat-to-marginally-higher output on a YoY basis, with Q1 not improving confidence levels, say analysts at Antique Stock Broking.

Positively, ONGC is seeing improving gas production, which rose 3.6 per cent YoY (including joint ventures) during Q1. However, falling global natural gas prices may weigh on domestic gas prices, and the same will weigh on prospects of ONGC’s gas business. 

In this backdrop, analysts at Jefferies expect ONGC’s earnings momentum to soften in H2FY20, but they also feel valuations are un-demanding at 6.25 times the FY20 earnings estimates. Most other analysts, such as those at Reliance Securities, Antique and others (along with Jefferies) maintain their positive ratings. 

Those at JM Financial, however, have a word of caution. They say that while valuations are not expensive, the government’s stake sale play could continue to be an overhang, given its 83 per cent holding in ONGC.

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