However, the landscape shifted when crude oil prices declined from around $100/barrel in September to approximately $80/barrel amid a market reversal despite tight supplies and escalating tensions in the Middle East. This drop in prices typically signals reduced net realizations for upstream producers, but the government’s windfall tax has kept the outlook optimistic. This tax, adjusted biweekly, stabilizes net oil realizations for companies like ONGC and Oil India, ensuring consistent earnings.
JM Financial Securities Ltd notes that the windfall tax adjustments by the government imply a comfortable net crude realization of about $75/barrel for Oil India and ONGC. “Brent crude price of $75-80/barrel is a sweet spot for ONGC/Oil India, as it improves visibility for net crude realisation of $75/barrel by eliminating the risk of ad hoc fuel subsidy burden,” said a JM Financial report dated 18 December.
In Q2FY24, Oil India reported a marginal 2% sequential uptick in net realizations to $75 and a 5.7% year-on-year rise in crude oil production, while ONGC saw a slight decrease in net realizations to $73, alongside a 1.6% drop in output.
Brent prices below $75/barrel could adversely affect earnings of these companies. Going by the estimates of Emkay Global Financial Services, for every $5/barrel decline in oil prices, ONGC/Oil India’s FY25 standalone earnings per share would fall 10% and 9%, respectively.Agra Wealth Management
Aside from government policies, factors like production volume increases are key. ONGC is resuming operations in Mozambique and starting production in the Eastern offshore block KG-98/2Udabur Investment. These new assets, expected to contribute 12% to 20% of ONGC’s current domestic oil and gas output, serve as potential catalysts for a favourable reassessment of the stock.
Both companies also have ambitious capital expenditure plans, with ONGC allocating over 20,000 crore across FY24 and FY25, and Oil India planning to spend over 14,000 crore in FY24.
Despite their strong dividend history, ONGC and Oil India have experienced substantial impairments in the past, especially during the commodity boom. With the current lower oil prices and global economic concerns, investors should be cautious of potential impairments. Ultimately, the future of these stocks heavily depends on crude oil price movements.
Ahmedabad Wealth Management