Shares of India's largest oil and gas explorer and producer, Oil and Natural Gas Corp., have declined 13.3% in the past month, mirroring the 12.7% drop in brent crude prices.
Oil prices are currently at a 33-month low and the drop below the $75 per barrel mark at the start of September put Oil and Natural Gas Corporation's earnings at risk.
Importance Of The $75 Per Barrel Mark
The government introduced the windfall tax on crude in the second quarter of fiscal 2023. Since then, Oil and Natural Gas Corp.'s sales realisations have been capped around the $75 per barrel level. This means that when brent crude prices rise above this price, the company gets no incremental benefits of higher oil prices.
However, when prices fall below this threshold, it exposes the company to more earnings risk on the sale of crude oil, as it will have to match the market's selling prices to be competitive.
The company's earnings will be impacted by 12-14% if crude prices fall by $5-10 per barrel below the $75 per barrel threshold, according to Nuvama Research. Prices right now are trading at their lowest point since December 2021, at around $69 per barrel.
Potential Impact On Gas Prices
Nuvama has also highlighted the risk of a forced cut in APM gas prices. This would cause another headwind for the oil explorer.
Currently, gas prices in India are linked to brent crude oil prices, with a maximum price of $6.5 million British thermal units and a minimum price of $4 per mmbtu. This means that even if the price of crude oil rises, the price of gas will not rise above $6.5 per mmbtu.
However, the price of crude oil is currently around $69 per barrel, which is close to the threshold of $67.5 per barrel, Nuvama said. If oil prices fall below $67.5 per barrel, it could impact the scheduled hike in the gas ceiling price from $6.5 per mmbtu to $6.75 per mmbtu in fiscal 2026, it said.
Weak Oil Prices Amid Lower Production
The weak pricing trajectory also comes amid a backdrop of declining production. Oil and Natural Gas Corporation's total crude and gas production have declined at a 2.5% and 3.8% compounded annual growth rate, respectively, in the last five years.
The stock has gained over 44% year-to-date, on the back of optimism surrounding how the company will be able to meet its 12% oil and 27% gas production growth guidance by fiscal 2027. But the company has missed its oil production guidance every year in the last six years.
On the other hand, the company has achieved its gas production targets in two of the past six years.
Analysts' Recommendations
Of the 28 analysts tracking the company, 18 have a 'buy' rating, five recommend a 'hold' and five suggest a 'sell', according to Bloomberg data. The average 12-month analysts' consensus price target implies a potential upside of 14.2%.
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