Rising Crude Oil Prices Drive OMC Stocks and ONGC. Is the Rally Sustainable?

The September 2023 quarterly results of ONGC, a leading upstream oil player, were keenly awaited given higher global crude prices emanating from the Russia-Ukraine war and the Middle East conflict.

The stock also hit a 52-week high of Rs 198 earlier this week on 7 November 2023, in anticipation of good numbers.

ONGC's oil realisations were US$ 84.8 per barrel in the September 2023 quarter, a fall of 11% on a YoY basis. The company's total crude oil output was broadly flat on a YoY basis at 5.25 million (m) tonnes in the second quarter of current financial year.

Its total gas output was also broadly flat in the September 2023 quarter on a YoY basis however, realisations were higher by 6.6%.

Nevertheless, ONGC's standalone revenue from operations declined 8% to Rs 351.6 billion (bn) in the quarter under review.

However, a reduction in statutory levies helped its operating profit margin improve 670 basis points to 48.7% in the quarter under review.

Standalone net profit of the company declined 20% YoY to Rs 102.2 bn in the September 2023 quarter, given the rise in finance costs and depreciation costs.

Earlier, oil marketing companies (OMC) like HPCL, BPCL, and IOC reported a vastly improved performance in the second quarter of current financial year, all thanks to high marketing margins from the retail sale of petrol and diesel along with inventory gains related to global oil prices.

As a result, HPCL reported a standalone net profit of Rs 51.2 bn in the September 2023 quarter vis-a-vis a loss of Rs 21.7 bn a year earlier.

Similarly, IOC, the largest OMC, reported a standalone net profit of Rs 129.7 bn in the September 2023 quarter vis-a-vis a loss of Rs 2.7 bn a year earlier.

Growth Prospects for ONGC

Global oil prices have been volatile in the December 2023 quarter - they crossed US$ 90 per barrel a few weeks earlier and are currently at US$ 79-80 per barrel levels.

Also, the company is optimistic of a recovery in its oil production going forward, and would be able to reverse the production constraints experienced in the first half of the current financial year.

However, there is considerable uncertainty related to predicting the future earnings of upstream players like ONGC due to the windfall tax levied by central government when global crude oil prices rise above US$ 75 per barrel. This windfall tax is reviewed on a fortnightly basis.

Also, for OMCs like HPCL, BPCL, and IOC there are considerable uncertainties relating to their marketing margins on retail sale of diesel and petrol, given large fluctuations in global oil prices and the hesitation to raise retail oil prices before the upcoming election season.

Valuations of ONGC

At the current price, ONGC barely trades at a TTM PE multiple of 6.5x.

The stock also offers a good dividend yield.

Along with Q2 results, the company's board also approved an interim dividend of Rs 5.75 per share. The record date for distribution of dividend has been fixed for 21 November 2023.

In 2023 so far, ONGC share price has gained over 30%.

Here's a table comparing ONGC with its peers.

Comparative Analysis

Company	ONGC	Hind Oil Exploration	Oil India	Deep Energy
ROE (%)	12.1	22.8	28.6	0.5
ROCE (%)	13.6	19.4	27.1	0.8
Latest EPS (Rs)	29.9	17.2	54.2	0.1
TTM PE (x)	6.5	9.8	5.6	0
TTM Price to book (x)	0.8	2.2	0.8	1.1
Dividend yield (%)	5.8	0	6.5	0
Industry PE	5.95
Industry PB	0.9

Data Source: Ace Equity

ONGC plans to spend over Rs 310 bn for oil and gas exploration in the next three years. It has also signed an agreement with the Solar Energy Corporation of India to develop renewable energy.

Going forward, the company plans to diversify its revenue base and continue to improve its existing business.

To know more about ONGC, checkout its factsheet and latest quarterly results.

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