Rising crude prices continue to boost prospects for upstream companies like ONGC and Oil India Ltd. Oil India, up about 44% on the stock markets since its November lows, added about 4% to its gains on Tuesday. ONGC, the biggest peer, also rose about 7% in today’s session, adding to more than 73% of the gains since the start of November.
Rising crude prices bode well for the achievements of these companies and therefore improve the earnings outlook. As diesel and gasoline prices are tied to the market, these companies no longer have a major subsidy burden to share with the oil marketing companies. Therefore, these companies are pure play on the price of crude oil, analysts say.
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Firms have also seen a steady improvement in their quarterly performance with growing achievements and normalized supplies after the lockdown was eased.
Oil India’s crude oil realization improved to $ 42.8 / bbl at T3FY21 up 3% sequentially. Even CGSB’s crude oil realization came in at 44.2 / bbl, up 2.5% sequentially. These are expected to rise further significantly, as Brent has consistently traded above $ 50 a barrel and has even crossed over $ 60 a barrel.
On the positive side, with a steady increase in spot gas prices, domestic gas prices, which are reviewed every six months, are also revised upwards from April 1. This will further increase the profits.
For Oil India, concerns remain on the production front. Analysts at HDFC Securities Ltd remain cautious on the stock, citing the lack of output growth for both oil and gas as one reason.
Meanwhile, ONGC is expected to see some increase in gas production even as oil production is expected to remain stable. “Despite the persistent delay, ONGC’s gas production is expected to grow 6% annually over fiscal years 20-23,” said analysts at Motilal Oswal Financial Services Limited. their estimates.
The key to profit growth therefore depends on keeping crude prices at higher levels. Analysts believe oil prices are unlikely to support more than $ 60 a barrel as OPEC and country supplies may normalize. Even HDFC Securities analysts expect oil prices to stay at $ 50 / bbl in FY22 / 23 versus $ 59 / bbl in FY20.