Lower oil prices would likely lead to a direct reduction in the earnings for ONGC, Oil India and GAIL, while gas economics also become unfavorable. The upstream, furthermore, will see material earnings decline and GAIL’s US LNG margins and LPG realization may also suffer, analysts believe.
“ONGC and Oil India are obvious losers as oil realizations drop by around 20 per cent in FY21, while H2 APM gas prices can see further downsides after a 25-30 per cent fall expected in H1. GAIL’s LNG portfolio, in which pricing is oil-linked but sourcing mixed - with US LNG being linked to Henry Hub and around USD5/mmbtu of fixed component, should see a hit on margins, coupled with decline in LPG realizations,” Emkay Global Financial Services said in a sector update report.
Analyst at Reliance Securities, meanwhile, expect ONGC to report loss in FY21E even if the Brent oil price averages at US$30/bbl. Every US$5/bbl fall in oil prices will lead to 17 per cent fall ONGC’s net profit.
In the recent management call, ONGC guided that the breakeven cost was US$40.05/bbl in FY19 with opex at US$12.8/bbl, depreciation, depletion, and amortization (DD&A) at US$9/bbl and levies at US$18-19/bbl. For ONGC Videsh, it may be US$34-35/bbl.
It has been further estimated that the outbreak of COVID-19 is expected to have a major adverse impact on global economic and oil demand forecasts in 2020, particularly for the 1st and 2nd quarters of the calendar year, according to CARE Ratings.
“It has been forecasted that global oil demand growth in 2020 will be less than 0.48 million barrel per day (mb/d), from 1.1 mb/d forecasted in December 2019 given the shutdown of factory operations in China, travel restrictions imposed and undertaken which has affected other economic activities around the world”, the rating firm said in an analysis on the outcome of the (Extraordinary) OPEC+ meeting.