Quiet Gainers of Crude Oil Spike

In the past year, Brent crude prices have risen by more than 50%, helped by an improvement in demand as Covid-19-led restrictions eased globally. Unsurprisingly, both the upstream companies had strong December quarter (Q3FY22) results. Shares of ONGC also touched a new 52-week high on the NSE on Monday. However, shares gave up their gains, tracking weakness in the broader markets, closing 1% lower.

Bloomberg data showed average Brent prices rose 8.8% sequentially to $79.4 a barrel in the third quarter. Higher crude oil prices are reflected in crude oil realizations of upstream companies in the quarter. ONGC’s crude oil realization from its designated oilfields rose 75% year-on-year (YoY) to $75.73 per barrel. Oil India’s average crude oil realization stood at $78.59 per barrel, up 78% year-on-year. Additionally, a sharp 62% increase in domestic gas prices since October 1 at $2.90 per mmBtu (Million British Thermal Units) further benefited companies.

Result: ONGC’s reported earnings before interest, taxes, depreciation and amortization (Ebitda) increased by 91 per cent year-on-year 15,970 crores. Net profit up six times 8,764 crore was helped by higher other income. Meanwhile, Oil India reports 38% growth in net profit 1,245 crores.

On the other hand, there was some disappointment on the production front. ONGC’s total oil production at 5.451 million tonnes (mt) declined by 3.2%, while gas production at 5.564 bcm (billion cubic metres) was also down 4.2% year-on-year. The company attributed the fall in production to the impact of Cyclone Takte and the spread of Kovid, among other things. Crude oil and gas sales were at 5.1MT and 4.3BCM respectively, lower year-on-year and up about 2% sequentially.

Oil India also reported year-on-year crude production and sales, though the gas segment performed relatively better. An analyst with a domestic brokerage said, therefore, the continuation of the trend in the gas business will have to be monitored. He said better realizations are helping both ONGC and Oil India earn earnings, but the volume triggers are still missing.

Higher oil prices will continue to favor upstream companies even as investors watch closely how the geopolitical situation develops. However, a firmer demand outlook should support the fall in oil prices. S&P Global Platts Analytics expects Asian oil demand to rise to 1.5 million barrels per day in 2022, up from 1.2 million barrels per day in 2021.

What’s more, analysts expect domestic gas prices to rise further in FY2023.

However, ONGC and Oil India shares have risen 68-94 per cent in the past one year, which suggests that a major chunk of the positives can be contained in it. Thereafter, volume growth remains significant.

A report by Yes Securities Ltd on February 14 said, “We believe that the recent rally in ONGC’s share prices has been largely driven by crude oil and natural gas prices, even though its production is on a decline and capital Expenditure is on the rise. Production is falling.” “We believe that a normalization of supply, in the near term and a push for sustainable renewable energy, will, in the long run, act as a deceleration for crude oil prices,” the report said.

For Oil India, expansion at the Numaligarh refinery could help improve the earnings outlook. Analysts at Prabhudas Lilladher said the refinery’s expansion to 6mtpa would boost its consolidated FY25 estimated Ebitda by 2.7 times.