ONGC, OIL's FY23 Earnings: Analysts More Than Double Forecast On Crude Spike

Higher oil and gas prices are likely to aid profitability of upstream companies or explorers as realisations improve.
<div class="paragraphs"><p>A dilapidated oil rig. (Photographer: Gaby Oraa/Bloomberg)</p></div>
A dilapidated oil rig. (Photographer: Gaby Oraa/Bloomberg)

Analysts have more than doubled their FY23 earnings estimates for oil and gas explorers in the last one year as they expect higher prices to sustain in the ongoing fiscal.

The consensus FY23 adjusted earnings per share estimates for Oil & Natural Gas Corp. and Oil India Ltd. have also been upgraded in the past three and six months, according to Bloomberg data.

The companies even saw a 10-13% upward revision in their one-year target prices in the past three months as the stocks beat the Sensex and BSE Oil & Gas Index.

Their valuations, however, are at a discount to the benchmarks.

“High crude and natural gas prices would invigorate the capex programmes of upstream companies,” ICRA Ltd. said in a report. “The credit profile of such companies would be positively impacted owing to significantly higher realisations on crude and natural gas sales.”

Brent crude has risen more than 35% so far in 2022, more so after the U.S. imposed sanctions on Russia for invading into Ukraine. A recovery in demand on easing Covid-19 restrictions, too, will keep prices elevated. While the Asian benchmark for oil has reiterated from its 14-year high in the first week of March, it’s still trading above $100 a barrel.

Acuite Ratings & Research Ltd. expects Brent crude to stay at $97 a barrel in FY23, while Crisil forecasts an average of $85-90 for the fiscal.

Natural gas under administrative pricing mechanism will cost more than double for the first six months of FY23. The price of gas from difficult fields, too, has been hiked by 62%. Domestic gas prices are expected to remain higher in the second half of the ongoing fiscal as global prices rise on uncertainties around Russian gas supply to central Europe amid the ongoing geopolitical tensions.

Morgan Stanley expects a hike of around 25% in the October gas price revision, while Nomura expects prices to increase to $10-11 a million metric British thermal units from $6 an mmBtu.

According to Morgan Stanley, every $1 an mmBtu change in gas price affects ONGC’s earnings by 5-8%. For Reliance Industries Ltd., it expects $1.5 billion (Rs 11,250 crore) earnings increase with gas price hikes in FY23.

Nomura estimates that every $1/mmbtu rise in domestic gas price increases ONGC and Oil India EPS by Rs 2.7 and Rs 4.5, respectively. The rise in prices for gas from difficult fields, according to the brokerage, will benefit Reliance Industries Ltd. “An increase in gas ceiling price would improve realization for Reliance’s E&P (exploration and production) business, but the overall impact could be limited as feedstock cost would increase for internal gas consumption in the refining and petrochemical segments.”

Analysts’ Views

IIFL Securities

  • Gas price hike bodes well for ONGC, Oil India and RIL, which account for the bulk of domestic gas production in India.

  • Higher realisation for difficult fields should encourage operators such as RIL and ONGC to fast-track their deep-water production schedules.

  • It upgrades ONGC, Oil India and RIL’s FY23-24 EPS by 18-21%, 14-15%, and 8-11%, respectively.

Morgan Stanley

  • Forecasts $3 billion (Rs 22,500 crore) earnings increase for ONGC in FY23 and, RoCE will improve to above 20% after more than a decade.

  • Expects RIL’s production from the KG-D6 field to increase to 27 mmscmd by FY24 with ramp-up in production from new and existing clusters.

HDFC Securities

  • Every $1 an mmBtu change in gas price realisation changes ONGC’s FY23E earnings by 3.5% and Oil India’s earnings by 4.6%.

  • In FY23E, ONGC (standalone) is expected to produce 20.8 MMT of oil and 22.3 bcm of gas, while Oil India is likely to produce 3 MMT of oil and 3 bcm of gas.

  • Expects ONGC’s and Oil India’s earnings to grow at an annualised rate of 14-18% over FY22-24E.

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