Unchanged natural gas prices could keep ONGC, OIL earnings in check

There were some expectations building on upward revision in gas prices with rising spot gas prices. But note that gas prices in Europe, Canada, the US and Japan have not risen significantly yet.

Since domestic gas pricing decisions take into consideration the average of international gas prices, it isn’t entirely surprising that prices have been kept unchanged. Nevertheless, since gas price increase in international markets comes with a lag of a quarter or so to spot gas prices, the Street will be watchful on gas price review in October, say analysts.

View Full Image

“Since the domestic natural gas price has remained unchanged and the price applicable for gas produced from difficult fields has been reduced by 10.8%, upstream gas exploration companies are not to benefit at all, as this will further lead to a decline in the earnings due to a decrease in per unit realizations in the natural gas segment,” said CARE Ratings in a note.

The upstream companies have been benefiting from improved crude realizations in line with the recent surge in crude prices. Subdued gas realizations, nevertheless, will limit benefits and earnings growth despite firm crude prices, say analysts.

On the positive side, domestic production is expected to rise by 2% during FY22, which should support volume growth, analysts say. The scale-up from KG basin block is also likely to aid volume growth.

The expected ramp-up of ONGC’s gas production during FY21 got delayed due to the pandemic. Thus, rising volumes in FY22 are likely to support the company’s earnings even as gas prices remain unchanged.

Firm crude prices are expected to boost ONGC’s performance in Q4. ONGC saw crude oil realization of $44.2/barrel, up 2.5% sequentially during the third quarter. With Brent oil prices touching $70 a barrel during the fourth quarter, the performance in the period is expected to be far better. Nevertheless, a resurgence of covid cases is posing challenges. Fuel demand may see an impact, leading to some correction in crude oil prices.

ICICI Securities Ltd in a recent report said, “European demand worries together with a rise in US oil inventories by 41 million barrels in past five weeks (as snowstorms hit refinery utilization) has led to a $7.6/barrel fall in Brent and $0.6-3.3/barrel fall in petrol and diesel cracks from recent peaks.” Given these concerns, the ONGC stock too has corrected about 12% from its early March highs.