Jal Irani`s view on ONGC

Jal Irani, MD- Oil & Gas Research, Macquarie Group shares his view on ONGC.

Irani told CNBC-TV18, “There are two elements to ONGC. First similar to oil marketing companies (OMCs), it is a counter cyclical but nevertheless what we have seen is that it is a counter cyclical till a point at which oil prices decline and then it becomes a gentle cyclical. That is the strange way in which subsidies have been shared in the past, there is of course no clear cut formula so one can never say that with a high degree of confidence.”
He further added, “We think that till threshold- some threshold level of maybe USD 75-85 per barrel that sort of a range till which it tends to be a counter cyclical after which it will become a cyclical. So that is one element to ONGC. The more fundamental angle is that we think ONGC is structurally poised to turn around its some where its volumes have been declining very mildly that is in my opinion, it is going to see a reversal a mild increase in volumes. Essentially it has added more than - it is a reserve replacement ratio has exceeded 100% now for five years which means that now as a develop stores reserves is found, its production is going to increase. Also its gigantic log such as Mumbai high recovery factor is barely 28-30%, which is very low by global standards and it is in the process of completing enhanced oil recovery projects in two of its largest regions in Mumbai offshore, which should start reviving volumes.”
“Fundamentally it is poised to do well and notably the imperial energy investment that it had made a few years back, which was very costly acquisition of USD 2.1 billion that would also potentially see some turnaround.
The Russian government seems to have given some concession, so reduced export taxes from 65% to 60% and also has removed mineral extraction tax; we believe that there could be a NPV value addition of about a billion dollars on that account. So the element of it being very a counter cyclical at the moment and there is more fundamental element, I think ONGC should do alright.”