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OCT 28 2016

Lower costs benefit ONGC in September quarter

  • Economic Times, ET Bureau / Hyderabad
  • Created: Fri 28th OCT 2016

Shares of Oil and Natural Gas Corp. Ltd (ONGC) have performed well in recent months. One reason for the optimism is increasing crude oil prices. Brent crude prices have averaged higher so far for the current quarter compared to the September quarter.

The state-run upstream oil company has announced a decent set of numbers for the quarter ended 30 September. Its operating profit or Ebitda came in at Rs9,539 crore. Analysts from Jefferies India Pvt. Ltd and Motilal Oswal Securities Ltd were expecting the measure at about Rs8,930 crore. Ebitda is short for earnings before interest, tax, depreciation and amortization.

One reason that helped ONGC beat estimates is a decline in operating costs. Statutory levies and other expenses declined 13% and 8%, respectively, on a year-on-year basis.

Not only that, exploration costs written off fell sharply as well. Finance costs dropped 7.5%. The upshot: ONGC’s pre-tax earnings increased 4% at a time when revenue declined 10% and other income was a bit lower.

While the company’s September quarter crude oil production is lower compared to last year’s quarter, crude oil and gas production both have improved compared to the June quarter. Net realization for the September quarter stood at $47.92 per barrel, an improvement on a sequential basis, which was pretty much expected. If the recent strength in oil prices were to persist, then upstream oil companies including ONGC will benefit this quarter. However, at the same time, some of the gains from higher oil prices are likely to be set off by the 18% lower domestic gas price effective 1 October.

But investors have no reason to complain. The ONGC share price has increased by as much as 43% from its lows seen in mid-May. The board has recommended a bonus issue in the ratio of 1:2. The stock currently trades at nearly 14 times estimated earnings for this fiscal year and appears to be adequately capturing the positives.



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