Oil and Natural Gas Corp (ONGC) posted good set of second quarter earnings and is set for a strong third quarter earnings on back of higher crude prices.
State-owned energy major reported a 3.1 per cent rise in its second quarter net profit as impressive gain from rising oil prices were taken away by fall in government mandated natural gas rates.
ONGC got USD 51.22 for every barrel of crude oil it produced in the quarter, up 6.9 percent over USD 47.92 per barrel realisation in September quarter of the last fiscal.
Throwing more light on the earnings and the outlook going forward AK Srinivasan, Director-Finance, ONGC said for every USD 1 crude change for a full volume of one year, we have topline will increase by Rs 900 crore and profit will increase by Rs 400 crore.
The gas prices for the last six month were around USD 2.48 per mmbtu and now it has been set at USD 2.89 per mmbtu along with a 10 percent increase in volume growth, which is expected to improve going forward.
The benefit of better gas prices will enhance our topline and bottomline, said Srinivasan.
With regards to HPCL deal, he said as on date the calculations point to Rs 35000 crore but the deal is yet to be closed and evaluation process is on from both sides, so cannot give a definite number.
However, the board has approved a borrowing upto Rs 25,000 crore. The decision on this will be taken an appropriate time.
As of now, HPCL will be a subsidiary post acquiring the government’s stake and later on we could look at synergies if any.
There has yet been no decision taken on selling IOC shares or keeping them, said Srinivasan.
Below is the verbatim transcript of the interview.
Anuj: After a long time things are looking up for Oil and Natural Gas Corporation (ONGC). It is a big if, if Brent crude prices trade in the USD 60-65 per barrel range and with no burden of subsidies, what kind of net realisations do you think ONGC will be able to show?
A: Up to Q2 we had an average of USD 51.22 and if the trend of the crude oil which has already picked up in the month of October and if it remains stable throughout the quarter and going forward, we should be able to make good realisations. For every dollar change for a full volume of one year, we have a topline impact of about Rs 900 crore plus. After profit after tax (PAT), impact is about Rs 400 crore. So you can just imagine if every dollar change, that much of bottomline increases.
Anuj: USD 51 for last quarter, what is the current realisation and if Brent crude is in USD 60-65 what would be your net realisation, that also would be an important point.
A: That is what I said, every dollar for a full year, we get about Rs 400 crore bottomline. If you look for half the period, it is about Rs 200 crore and about even USD 5-6 average increase, that adds up to about Rs 2,500 crore on to our bottomline.
Latha: A word more on gas production and prices as well, what has been the output, has there been any increase, and do you foresee an increase in prices there as well?
A: The gas prices for the last six months, we were getting Rs 2.48 per mmbtu. Now that same price has been set at Rs 2.89 per mmbtu. Also the volume growth has been there in Q2; we had a 10 percent increase. Going forward in the current year we are definitely going to do better than the last year in the gas production.
The incremental increase on the gas price from Rs 2.48 to Rs 2.89, that will also give us a benefit in our topline and bottomline. For every dollar increase in the gas price, we get an impact of about – topline is about Rs 4,000 crore and after netting off all taxes and then we get about Rs 2,600 crore. So if half a dollar change for half a period, it is almost Rs 600 crore plus increase for us on the gas side.
Surabhi: You have given us the math, I mean there is Rs 2,500 crore benefit on the bottomline thanks to the higher oil prices and of course you have explained what that means for gas as well. Can you give us a sense of the kind of output increase, the volume growth that we will see for this year in both oil and gas so that we have some sense of the overall profitability as well, how much additional oil as well as the gas volumes?
A: Crude oil is going to be in the range of 26 million tonne including my share of joint venture and which is almost the level which we had done in our last year. So definitely there is an increment or we are able to maintain our production levels. They can be slightly more than the last year numbers of 25.99. So we should be able to do 26 plus on that.
On the gas side, we had done about 23bcm of our production last year and this year it is going to be 25bcm plus of gas production for the current year. So this is the volume growth which we are looking out in oil and gas. Incrementally the price, what I had mentioned, the math which I have given you, was based on that every dollar increase it gets a topline of Rs 900 crore for a full year period. So I am just looking the increase has set in only from October onwards.
So even if you look, the USD 5 increase which is happening, so, that will give me an upside of topline and bottomline by 400 into five or even if dollar is moving still further, it is another dollar add on Rs 400 crore. That is what I gave you a math of Rs 2,500 crore roughly. These are all subject to oil price remaining at this contestant level
Latha: Let us go by some calculation, Moody’s calculation is that the market cap, your stake in HPCL would cost you Rs 35,000 crore and they are estimating you will borrow Rs 25,000 crore. Is that a fair math to go by because that will affect your bottomline anyways?
A: The calculations on the HPCL deal, as on date the numbers are coming around Rs 35,000 crore. However, actually the deal is yet to be closed and the process of evaluation is happening on both the sides. So what will be the fair number, I will not be able to make at this juncture, but definitely we have got the approval of our board and all to borrow up to Rs 25,000 crore and that is a flexibility which is available to us at that point of time what amounts we need to borrow and that will be just taken care at the right appropriate time.
Latha: Will you ever contemplate synergies with HPCL in any form whatsoever or will it just remain as a subsidiary?
A: It is as of now, it is going to be a subsidiary. We are just acquiring the stakes of HPCL from the government of India and making a subsidiary which is going to hold 51.11 percent with the company. As we go along, we may look at the synergies to be built up within the downstream companies.
Surabhi: The critics and cynics will argue and say that this is perhaps a deal that is really great for the government because the government instantly gets the cash, whereas for you, what are the immediate synergies or benefits because the gearing is going up, I am guessing the debt to equity post this borrowing will be close to two times?
A: Not necessarily. The cost is definitely going to be at a cheaper funds, and we don’t expect it is going to be very high for us.
Latha: Do you really need to keep Indian Oil Corporation (IOC) shares then?
A: That is definitely a call made by the company, at what time we need to really keep it or make it go to the downloading them but as of now we have not worked out our plan how do we fund these things.
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