ONGC Earnings Lean On Two Factors —And Neither Is Holding Up
Oil & Natural Gas Corp. has not only seen declining oil production but has also consistently missed oil guided targets for the past six years.
Oil & Natural Gas Corp. faces a tough outlook, with volatile global oil prices and a steady decline in its production.
While high prices might boost revenue, windfall taxes and a projected price drop limit gains. Compounding issues, crude production has declined for a decade, with gas output falling 3.8% annually during 2019–24, according to NDTV Profit's calculations.
These fundamental challenges raise questions about the company's growth prospects.
Oil And Gas Pricing
ONGC's earnings are generally insulated from oil price swings, with sensitivity kicking in only when Brent crude drops below $75 per barrel, according to a HSBC Research note in September.
Although windfall taxes are currently nil, the Union government can reimpose them if prices rise, capping ONGC's crude realisations again.
However, oil prices may remain subdued going into 2025. Major brokerages cite trade tariffs and possible OPEC+ supply boosts as key factors.
ONGC's gas price realisation from its nomination fields remains capped at $6.50 per MMBtu until the end of the current fiscal, with only a modest $0.25 increase each year from fiscal 2026.
However, ONGC has an approval to charge a 20% premium for gas from new wells, pricing it at 12% of the Indian crude oil basket when production begins.
Disappointing Production Performance
ONGC has not only seen declining oil production but has also consistently missed oil guided targets for the past six years.
The company guided for a 22.8 million tonnes of oil production target in fiscal 2019. However, since then, the company has not crossed the annual 22 MT production level.
On the gas production front, the company has achieved its volume targets for only two of the past six years.
Delay In KG Block: Another Headwind
KG-98/2, ONGC's flagship deep-water project, launched in 2021 with a $5 billion investment, was expected to reach peak output of 10 million standard cubic metres per day by 2024.
However, it produces just 12,000 barrels of oil currently and 1.6 mscmd of gas. ONGC has since cut peak production targets by 42% for oil and 33% for gas
The ramp up of the block has been delayed to May or June next year due to supply concerns. Therefore, the company will only add 3.5 million standard cubic metres of gas per day capacity from May or June 2025, according to a person in the know.
As per Nuvama Research, the viability of the project stands at risk due to the high drilling cost and production guidance being reduced meaningfully.
