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Trending oil prices augur well for ONGC; consistently low production a concern.

What’s buzzing - ONGC reported Q2FY22 results that were above our estimate on the profitability front on account of write-back of deferred tax liability on implementation of new corporate tax regime, while production numbers were broadly in-line with estimate. 

Context - Revenue increased 5.8% QoQ to Rs.24,353.6 crore against our estimate of Rs.25,023.3 crore on account of higher realisation. Net realisation increased by 5.7% QoQ to US$ 69.4/barrel (bbl). On production front, oil production was up 1.4% QoQ and was at 5.5 million metric tonnes (MMT), in-line with our estimate. Gas production increased 3% QoQ to 5.5 MMT, (can you check this figure pl. shouldn’t gas production should be measured in SCM?), marginally higher than estimate.Oil & gas production fell by 3.8% and 7% YoY, respectively.EBITDA, or operating profit during the quarter increased 8.8% QoQ to Rs.13,226.2 crore (our estimate: Rs.13,071.7 crore). Depreciation, Depletion, and Amortization (DD&A) expenses (an accounting technique that enables companies to gradually expense various different resources of economic value over time in order to match costs to revenues.) at Rs.4,641.6 crore being lower than estimate and other income of Rs.3,146.5 crore (better than expected) aided the profitability.During the quarter, ONGC switched to lower corporate tax rate, leading to negative tax outgo of Rs.7,195.4 crore. Consequently, PAT was well ahead of our estimate and was at Rs. 18,347.7 crore, up 323.3% QoQ.


Our perspective - The movement in oil prices is important for ONGC's performance, going ahead. Oil prices are seen trending upwards sequentially over last five quarters.Currently, Brent oil prices are trending in range of US$80-85/bbl. Also, domestic gas prices were revised upwards in semi-annual price revision in October. Current trend in global oil & gas prices augurs well for ONGC.However, ONGC’s share price has underperformed the benchmark over past four years. Low volume growth on a sustainable basis remains a key concern for the company and needs to be addressed in order to create value for shareholders.