Cheer For ONGC Investors: Higher Oil And Gas Prices Should Drive Earnings

Cheer For ONGC Investors: Higher Oil And Gas Prices Should Drive Earnings

The Oil and Natural Gas Corporation (ONGC) stock has significantly lagged the benchmark S&P BSE Sensex over the past year, even as prices of crude oil, its mainstay, have rallied (see chart). There has been some catching up in the past week, led by improving prospects in the business. If the trend sustains, which seems likely, ONGC’s investors could see good returns.

The unknown, however, is whether the government will ask the company to bear the subsidy burden if oil prices rise sharply, as was the case a few years ago. This is one reason the market is cautious on government-owned producers like ONGC, as well as its three oil marketing companies, Hindustan Petroleum (HPCL), Bharat Petroleum (BPCL) and Indian Oil (IOC). For now, analysts presume this might not happen and, hence, expect ONGC to gain from rising prices and output.

With gas prices for locally produced fields being revised to $3.06 per mBtu (million British thermal units) for the first half of FY19 from $2.89 per mBtu in the second half of FY18, an increase of 5.9 per cent sequentially and 10.1 per cent year-on-year, gas producers remain in a sweet spot. The ceiling price to be produced from difficult fields has been raised by 7.6 per cent to $6.78 per mBtu. This should benefit upstream oil and gas exploration companies such as ONGC, Oil India and Reliance Industries further, resulting in higher earnings. Read More

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