Oil and Natural Gas Corp. Ltd’s (ONGC) standalone gross crude oil realization fell about 8% year-on-year in the September quarter (Q2FY25) to $78.3 per barrel. Yet, its Ebitda at ₹18,200 crore was broadly in line with analysts’ estimates. Windall tax was much lower year-on-year leading to improved net realization, thus boosting operating profit performance to that extent.
However, consolidated Ebitda was down 26% year-on-year to about ₹21,800 crore due to lower refining margins at its subsidiaries—Hindustan Petroleum Corp. Ltd (HPCL) and Mangalore Refinery and Petrochemicals Ltd (MRPL).
While the company has managed to ramp up its production from the KG basin field, it has revised its overall production guidance downwards for FY25-27. It is well-known that ONGC has been struggling to restrain declining production from its fields, down about 20% over FY19-24.
The good news is that the ramp-up of crude oil production from the newly developed KG basin 98/2 block to 25,000 barrels per day (bpd) in October, up from 12,000 bpd in the June quarter should help it beat FY24 production figure.
By FY25-end, production is estimated to reach 45,000 bpd, whereas gas production would increase to 10 mmscmd from 1.8 mmscmd currently.
Besides, ONGC is also expected to gain from the government notification issued in August, allowing the company to charge higher prices for gas produced from new wells and additional production from old wells. At a crude price of $70 per barrel, this implies nearly 30% additional revenue from these sources, currently at 4.7 mmscmd (million standard cubic meters per day), or about 9% of ONGC’s total gas production. Further, this would increase significantly with the KG basin ramp-up.
The company is also expecting gas production from two more blocks, for which it has given the contract for platform development, to be completed by the end of FY26. The company projects these two fields to produce 9 mmscmd of gas, adding over 15% to current gas volumes.
Yet, the downward revision of the company's volume guidance to 41.9 and 44.9 mmtoe (million tons of oil equivalent) for FY25 and FY26 from 43.8 and 46.5 mmtoe earlier weighs heavily on its prospects.
“We have moderated our overall oil/gas sales volumes by 2.5% to 3% for FY2025-27E. Our FY2025/26E earnings reduce by 5-6% on lower refining (HPCL and MRPL) and likely impact of OPaL (ONGC Petro-additions Ltd) becoming a full subsidiary,” said analysts at Kotak Institutional Equities in a 12 November report. The report cites large capex, averaging around ₹35,000 crore annually as a key concern.
To add to the woes, OPaL is incurring continuous losses, primarily due to high cost of raw materials. Management expects the subsidiary to turn profitable in FY26 after the recently received government approval to infuse funds, and the allocation of gas at a subsidized rate, helping it lower interest expenses and cost of production.
Nevertheless, with the drop in crude oil price affecting its earnings outlook, ONGC’s stock price is down about 27% from a 52-week high of ₹345 apiece on 13 August. Of course, a further decline in crude prices could create incremental pressure on earnings. The stock trades at an enterprise value of 4.9x its FY26 estimated Ebitda, shows Bloomberg data.
While the valuation looks reasonable, a full ramp-up of production from KG field over the next two-three quarters would determine the stock's performance.
