Despite windfall tax, ONGC, Oil India's earnings look positive for FY23

With diverse revenue streams RIL is less impacted, while oil marketing companies have seen earnings downgrades amidst volatility in oil prices

The first quarter for the 2022-23 financial year (Q1FY23) was difficult for the entire energy sector. Prices spiked after the Ukraine War started in late February and they remained elevated and volatile through this period. In theory, this should have meant good profits for upstream producers, and margin pressures for refiners and retailers, who would, however, be able to positively revalue inventory accumulated earlier, as crude and gas prices rose.

However, while downstream players in retail did see margins squeezed, refiners saw record margins, and upstream producers did fairly well. The price of the Indian crude basket rose from $103 per barrel in April to $116 in June, before easing down subsequently to $106 (July) and $97 (Aug 1-27). Gas prices have varied widely due to the cut-off of Russian supplies and in certain cases, gas prices have risen three times. Domestic gas prices have more than doubled, at $6.1 per mmbtu, for Apr-Sep 2022, versus $2.9 (Oct21-Mar 22).  

The public sector undertaking oil marketing companies (OMCs) reported aggregated losses of Rs 17,000 crore at earnings before interest, tax, depreciation and amortisation (ebitda) level and net losses of Rs 18,480 crore. Reliance Industries, however, delivered 63 per cent rise in year-on-year (YoY) ebitda and 41 per cent rise in YoY profit after tax (PAT).

ONGC and OIL together reported 2x growth in YoY ebitda, and 3.5x growth in YoY PAT. The city gas distribution companies saw single digit rise in ebitda. The OMCs have seen drastic earnings downgrades but RIL, which has many other revenue segments, is less affected. Benchmark refining margins (Singapore) hit record highs in Q1 of $24 per barrel but has since dipped to around $8 per barrel and RIL may have issues if there’s a ban on high-speed diesel exports.

Where ONGC and OIL are concerned, the ‘windfall’ tax will limit net realisations to an assumed rate of $70-75 per barrel but even so, the earnings growth will be good for FY23, and probably for FY24 too. The windfall tax was initially Rs 23,250 per tonne ($40/barrel) on crude oil, and reviewed every fortnight. It is now reduced to Rs 17,750 per tonne ($30/barrel), which caps ONGC’s profitability on crude.

ONGC’s standalone revenue (which excludes its control of the OMCs, HPCL and MRPL) rose 83.8 per cent YoY and 22.7 per cent QoQ (quarter-on-quarter) to Rs 42,321 crore in Q1FY23, mainly owing to higher crude oil price realisation and the hike in domestic gas prices. Standalone ebitda jumped 121 per cent YoY and 46.5 per cent QoQ to Rs 25,489 crore. The ebitda margin increased by over 10 per cent. ONGC’s total crude production rose 2 per cent YoY to 5.394 million metric tonne and gas production increased 1.4 per cent.

ONGC entered into an agreement with ExxonMobil for deep-water exploration on the east and west coasts. The company targets doubling its upstream production, tripling its refining capacity, plus undertaking exploration by 2040. It has earmarked Rs 30,000 crore for capex. The Ukraine War has affected overseas subsidiary ONGC Videsh’s activities at the Sakhalin-1 oilfield site in Russia.

ONGC (and OIL) have seen share prices dropping 20 per cent (and 21 per cent) respectively, since April. However, most analysts still have ‘buy’ recommendations on both stocks with target prices for ONGC ranging between Rs 146 and Rs 160, which is a small upside from the current price of Rs 136.