ONGC, Oil India post healthy Q3 results on higher realisation

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Oil and natural gas producers of India reported profits in the third quarter of financial year 2022-23 due to high oil and gas realisation.

State-run explorers Oil and Natural Gas Corporation (ONGC) and Oil India Limited (OIL) booked profits in the December quarter as the former reported year-on-year (YoY) growth of 26 percent in standalone net profit at Rs 11,045 crore, while Oil India Ltd posted 40 percent increase in net profit at Rs 1,746.10 crore.

Most brokerages maintain Buy rating on ONGC, as the country’s largest explorer met market expectations.

“We maintain our BUY recommendation on ONGC with a target price of Rs 170, based on (1) an increase in crude price realisation, and (2) an improvement in domestic gas price realisation. Q3FY23 revenue/EBITDA (earnings before interest, taxes, depreciation, and amortisation) at Rs 386/204 bn, came in marginally above our estimates, but APAT, at Rs 110 bn, came below estimates due to higher-than-expected DD&A and finance costs and lower-than-expected other income,” said HDFC Securities in a note.

Production of oil and natural gas by ONGC largely came in line with market expectations in the quarter. Analysts are optimistic about ONGC’s production growth in 2023, as commencement of oil production from KG Basin is expected in May or June of the year.

“First oil from the KG Basin is expected in May/June 2023. Incremental production guidance stands at 1.9mmt of oil and 2.8bcm of gas in FY24 and 2.2mmt and 3.8bcm in FY25. At the peak, incremental production could be 45kbopd and 12mmscmd in FY25,” said Motilal Oswal in a report.

Meanwhile, Oil India said the company posted its highest-ever profit in the quarter due to better realisation and increase in production. In Q3, oil production of the company increased 7.03 percent from a year earlier, while gas production grew by 1.64 percent.

“Oil India reported consolidated EBITDA/PAT of Rs 41.8 bn (+55 percent Q/Q)/Rs 25.3 bn (+20 percent Q/Q), led by healthy crude oil & gas realisation, along with steady Numaligarh Refinery Ltd (NRL) performance. Standalone EBITDA came at Rs 28.6 bn (+54 percent Q/Q PLe Rs 24.1 bn) due to lower other expense, while PAT remained flat at Rs 17.5 bn (PLe Rs 15.6 bn),” said the brokerage Prabhudas Lilladhar.

Windfall tax impact

Quarterly results of exploration and production companies were impacted by implementation of windfall tax on crude oil. However, windfall tax is revised every 15 days in line with international crude oil prices.

“While the levy of windfall tax by the Centre with fortnightly revision had raised concerns on the realisations of upstream companies, the government has adjusted windfall taxes in line with crude oil fluctuations. Our estimate suggests that the government is allowing a post-windfall realisation of $68-81/bbl and we expect the same to remain at ~$70/bbl for FY24-25E,” said Motilal Oswal in a report.

On February 16, the Indian government reduced the windfall tax on domestically-produced crude oil to Rs 4,350 per tonne from Rs 5,050 per tonne. The government had first implemented windfall tax on domestic production of crude oil in July 2022 to arrest large profits booked by oil producers due to high global crude oil prices.

Crude oil is now trading at around $80 per barrel compared to an all-time high of $140 per barrel in March 2022.