Shares of Oil and Natural Gas Corp and Oil India have outperformed the Nifty 500 index so far in 2021, increasing by about 65 percent and 88 percent, respectively. In comparison, the Nifty 500 has advanced about 32 percent.
A good portion of the outperformance in the state-run oil producers came in the past few months, in keeping with rising crude oil prices. Benchmark Brent crude oil now hovers at about $82 per barrel, having risen about 60 percent, so far, this calendar year.
ONGC and Oil India benefit from higher crude prices, which boost their price realisations. For both companies, realisations in the September quarter (Q2 of FY22) increased year-on-year as well as sequentially.
ONGC’s crude realisations stood at $69.36 a barrel in Q2, up 5.7 percent vis-à-vis the June quarter and 68 percent higher year-on-year.
Oil India’s realisations were $71.35 a barrel in Q2, up 6 percent sequentially and 57 percent year-on-year.
So far in the December quarter, crude oil prices have shown strength and that should reflect positively in the realisations of ONGC and Oil India for the quarter.
JM Financial Institutional Securities said every $1 per barrel increase in crude price resulted in their valuations rising by about 3 percent for ONGC and 2 percent for Oil India.
“ONGC is a preferred play over Oil India, given its higher leverage to crude price due to its overseas oil portfolio and relatively better production growth visibility,” JM Financial’s analysts said in a report on November 13.
Commenting on ONGC, analysts from Centrum Broking said, “We factor a decline in production estimates offset by much stronger oil and much higher gas prices and hence, we have raised our FY22/23E earnings per share by about 14/30 percent, with gas price estimates raised by 30 percent for FY23E.”
Additionally, the potential increase in domestic gas prices following the spike in global gas prices is expected to benefit both companies.
It’s not a given that the good run will continue and that is a risk. Investors will closely watch how crude prices behave in the days to come. A downward slide in oil prices would be detrimental for the sentiment of these stocks.
“While crude oil prices are strong now, we expect them to reasonably cool off by the second half of next year, as production increases,” said Nitin Tiwari, an analyst at Yes Securities. “Accordingly, we expect the rally in shares of ONGC and Oil India in recent months, which was fuelled by higher crude prices, to moderate as well.”
From a long-term perspective, the increasing thrust on renewable energy is likely to pose a threat to oil prices. That’s not all. The production outlook isn’t exciting enough for the upstream oil companies.
“Muted production outlook is a sore point for both companies even as investments to raise production have increased. Note that production for both companies has continually decreased over the past decade,” Tiwari said.