Unchanged natural gas prices may keep check on ONGC, Oil India earnings

On the positive side, domestic production is expected to rise by 2% during FY22, which should support volume growth, analysts say

Domestic gas prices have been kept unchanged at $1.79/mmBtu (million British thermal units). This is not encouraging news for upstream oil and gas producers as Oil and natural Gas Corp. Ltd and Oil India Ltd.

There were some expectations building on upward revision in gas prices with rising spot gas prices. But note that gas prices in Europe, Canada, US. and Japan have not risen significantly yet. Since domestic gas pricing decisions that take into consideration the average of international gas prices, it isn’t entirely surprising that prices have been kept unchanged. Nevertheless, since the gas price rise 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.

“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 realisations in the natural gas segment” said CARE Ratings in a note.

The upstream companies have been benefiting from improved crude realisations with the surge in crude prices in the recent past. The subdued gas realisations, 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 likely to aid volume growth.

The earlier expected ramp-up of ONGC gas production during FY21 got delayed with the onset of the pandemic. Thus, rising volumes in FY22 can support earnings even as gas prices remain unchanged.

The firm crude prices however are expected to boost the company’s performance in Q4. ONGC had seen crude oil realisation of $44.2/barrel, up 2.5 % sequentially during Q3. With Brent oil prices having touched $70 a barrel during Q4, the performance in the quarter is expected to be far better. Nevertheless, rising Covid cases once again is posing challenges. Fuel demand may see an impact leading to some correction in crude oil prices. Analysts at ICICI Securities Ltd in a recent report said, “European demand worries together with rise in US oil inventories by 41 million barrels in past five weeks (as snowstorms hit refinery utilisation) has led to $7.6/ barrel fall in Brent and $0.6-3.3/barrell fall in petrol and diesel cracks from recent peaks.” Given these concerns, the ONGC stock too has corrected by about 12% from its early March highs.

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