One-offs take a toll on ONGC’s March quarter earnings

Oil and Natural Gas Corp. Ltd’s (ONGC’s) profitability in the March quarter was adversely impacted by certain one-off elements.

The oil producer had to shell out Rs2,444 crore towards royalty payments to the states of Gujarat and Assam. There was also a provision of Rs1,944 crore relating to employee pay revision.

To be sure, a high proportion of “other income” and decline in tax outgo did compensate to some extent.

Nonetheless, the company’s reported stand-alone net profit declined 6% for the March quarter on a year-on-year basis to Rs4,340 crore, much below the Street’s forecast.

But analysts point out many positives in the company’s performance.

Operationally, higher crude oil prices facilitated an improvement in net price realisations. ONGC’s crude oil net realization increased to $54.9 a barrel in the March quarter from $34.9 a barrel in the year-ago quarter and $51.8 a barrel in the December quarter.

Oil production was marginally down sequentially but 0.8% higher compared to the same quarter last year. Gas production increased 13% versus the same period last year, while it declined about 1.3% compared to the December quarter.

What’s more, ONGC told analysts that gas production will continue to rise this fiscal year due to incremental production from many offshore fields. In general, the production outlook is better.

Analysts from IDFC Securities Ltd say that with the development of multiple assets in the offing in the country (Vashista, B 193 Cluster, Cluster 7 fields KG onshore) along with the development of the Krishna-Godavari onshore field, oil and gas output is likely to show healthy growth over fiscal years 2017-2021 (FY17-21).

Further, the company’s overseas arm, ONGC Videsh Ltd (OVL), acquired a 26% stake in the Vankor field in Russia and that should boost its production. In fact, OVL’s FY17 total production already got a fillip from Vankor, increasing to 12.8 million tonnes of oil equivalent (mtoe) from 8.9 mtoe in FY16.

Overall, IDFC Securities estimates ONGC group output to grow at a compound annual growth rate of 5.2% over FY17-21.

Currently, one ONGC share trades at about nine times estimated earnings for this fiscal year, at undemanding valuations. It helps crude oil price outlook a bit that the Organization of the Petroleum Exporting Countries has extended its production cuts by another nine months in an effort to bring the oil market back to balance.

Still, rising US shale output continues to pose a threat. While increasing output augurs well, higher crude oil prices will go a long way in improving the prospects of the ONGC stock.