Higher Oil Prices Didn’t Help ONGC Stock. Here’s Why
Oil and Natural Gas Corporation Ltd. should benefit from rising crude prices. But that doesn’t reflect in its stock’s performance as India’s largest oil explorer has had the worst first half in a decade.
Shares of ONGC have declined 19 percent so far in 2018. That’s when Brent Crude—the Asian benchmark for crude prices—rose 17 percent during the period.
And it’s one of the most preferred stocks in the S&P BSE Oil & Gas Index, with nearly 31 of the 38 analysts tracked by Bloomberg rating it a ‘Buy’.
Here’s a look at what went wrong for the stock:
The government’s petroleum subsidy allocation for the current financial year may fall short as crude oil prices are expected to stay high. Crude is expected to be 31 percent more expensive in the current financial year over the previous year, according to data compiled by Bloomberg.
The government has allotted Rs 24,933 crore — Rs 20,377.8 crore for liquefied petroleum gas and Rs 4,555 crore for kerosene — towards subsidies in this financial year as compared with Rs 24,460 crore in the year ended March.
If the government falls short of budgeted estimates, ONGC can be asked to plug the gap. The oil and gas major used to share the subsidy burden with the government until the quarter ended September 2015. A shortfall in subsidy increases the earning risk for upstream companies if they were to share the burden, Morgan Stanley had said in a report. ONGC management had earlier said in an interview to BloombergQuint that they’ve not been asked to share the subsidy burden. The impact of subsidy could be limited, with the rising prices of subsidised fuels.
Weak Gas Prices
The rates of domestically produced gas are fixed and revised every six months under the government’s new pricing regulations. After the government introduced the administered pricing mechanism in 2014, LPG prices have fallen by over 30 percent. Despite two recent price hikes, the prices are lesser than ONGC’s average cost of production. The average cost of production of gas is close to $3.5 per million British Thermal Units as against a selling price of $3.06/mmBtu.
ONGC on average had surplus cash of over Rs 11,000 crore through the financial years 2010-17. In the year ended March 2018, it became indebted after it acquired the government’s stake in Hindustan Petroleum Corporation Ltd., India’s third largest oil and natural gas company, in a move intended to create an integrated oil company.
ONGC bought 51 percent stake in HPCL for Rs 36,915 crore, of which Rs 25,000 crore was paid through acquiring debt. It plans to spend close to Rs 32,000 crore as capital expenditure to boost oil and gas production in the country.
The company had plans to merge the downstream companies — HPCL and Mangalore Refinery and Petrochemicals Ltd. — after the acquisition. However, there has been no progress on the plan with the company still staying that it will evaluate potential restructuring of group companies.