A Year Of Hope Turns Into Despair For ONGC

Analysts expected 2020 to be the best year in more than a decade for India’s largest oil explorer. Coronavirus has wiped off those hopes.

The average 12-month target compiled by Bloomberg at the start of 2020 indicted a potential upside of 45 percent for Oil and Natural Gas Corporation Ltd. But the state-run explorer has tumbled more than 41 percent so far this year to hover near its 2004 levels. ONGC dropped as much as 14.35 percent on Monday — the biggest fall in 17 months.

That’s because Brent crude — the Asian Benchmark — has fallen by half so far this year as demand fell because of coronavirus outbreak. The commodity plunged more than 30 percent in a day after talks to cut production broke down between OPEC and Russia, triggering an all-out price war. If crude falls further or stays at this level, ONGC’s fields will enter operational losses.

There’s more to worry as forecasts suggest a deeper plunge in crude.

Brent crude may dip as low as $20 a barrel, testing the levels at which some producers can operate, analysts including Damien Courvalin from Goldman Sachs Group wrote in a report. The prognosis for the oil market is even more dire than in November 2014 when such a price war last started, as it comes to a head with the significant collapse in oil demand due to the coronavirus, it said

BloombergQuint’s queries emailed to ONGC on Monday remained unanswered.

The operational cost for producing a barrel of crude for the state-run explorer is on average around $25-30 per barrel plus taxes at 31-32 percent of the crude price, an ONGC official said on the condition of anonymity as the person is not authorised to speak to the media. That brings the total cost of production at $35-40 a barrel. By comparison, the Brent is hovering around $32-33 a barrel.

The break-even for ONGC is close to $35-37 a barrel and anything below that will pinch the company, said Nitin Tiwari, oil & gas analyst at Antique Stock Broking. If prices sustain below these levels for a long time, the company will start reporting losses at operating level, he said.

Moreover, according to Tiwari, the share price is not factoring the current crude prices as the market could be expecting crude to bounce back above $40 a barrel. But if the current prices continue in the next quarter, he said, the problem could intensify as gas prices, too, are expected to be revised downwards from April 1.

As it is, the drop in crude prices comes as a double whammy for the producer that has seen prices of gas fall below its cost of production. Prices of liquefied natural gas in India are revised every six months by the government. On Oct. 1, they were cut 12.5 percent to $3.23 per million British thermal units. The average cost of production for ONGC is close to $3.59/mmBtu.

According to ONGC’s FY19 annual report, every $1 a barrel change in prices of crude oil, natural gas and other products has an impact of Rs 6,004 crore on its revenue. For a company like ONGC where bulk of the production comes from legacy fields and production costs rise for every incremental barrel, lower prices are a significant disincentive for any major capital programme, it added.