Financial Daily from THE HINDU group of publications
Sunday, Aug 08, 2004
Financial Daily from THE HINDU group of publications Sunday, Aug 08, 2004 |
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Investment World
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Stocks Markets - Recommendation ONGC: Buy Raghuvir Srinivasan
OPEC: Little headroom to raise output.
The turnover was up 31 per cent at Rs 10,387.2 crore after accounting for subsidy on LPG and kerosene passed on as discount to the downstream refining and marketing companies. If the discount of Rs 814.8 crore is included, the topline would show a big 41 per cent improvement over the same quarter last year. More striking, however, is the growth in post-tax earnings which was up by a whopping 61 per cent (after adjusting for the earnings loss from subsidy sharing). Clearly, ONGC is a major beneficiary of strong global oil prices. The company's crude oil supplies are benchmarked to the Nigerian Bonny Light grade, which is currently ruling in the vicinity of $40 a barrel.
Oil prices may remain high
The outlook for global oil prices is bullish in the near term due to a combination of factors. First, the growing mismatch in the basic demand-supply equation. The Organisation of Petroleum Exporting Countries (OPEC) did hike production quotas a couple of months back. But supply has not been able to keep pace with demand despite the cartel members producing well in excess of their quotas. The main factor driving prices upwards now is that the spare production capacity available with OPEC producers is fast running out, which means that there is little possibility of new oil flowing into the market in the near-to-medium term. Second, the sustained tension over the possibility of terrorist strikes on oil installations has kept the oil market on tenterhooks. The third factor driving prices is the role played by speculative funds moving into oil futures to cash in on the rising values. Ironically, this is a self-sustaining move — as large funds move into the futures market, their values rise and vice-versa. A fourth factor will come into play in the next two months as the Western countries start stocking up fuel for the winter. Traditionally, this has caused oil prices to rise during the winter months and it will be no different this time.
Higher realisations
The net impact of all this is that ONGC will continue to enjoy superior realisation for its production. However, it is not as if this is going to drive its stock upwards relentlessly. The risk that the company is subject to from government policy has been acting as a drag on the stock valuation and it will continue to be so in future. A rise in global oil prices also means a corresponding increase in the subsidy burden borne by the company on LPG and kerosene. This factor could weigh down earnings growth in the remaining three quarters of this year. The flat production growth in oil in the last couple of years and falling trend in gas production are cause for worry. The large investment in redevelopment of the main asset — Mumbai High — has yet to translate into major production gains for the company. Its plans for expanding vertically into related businesses notwithstanding, ONGC needs a major domestic find soon for the company, and the stock, to vault into the next level. Shareholders can continue to hold the stock with a near-to-medium term perspective. Any weakness in the stock owing to broad market factors can be used to accumulate it with a similar holding perspective as above.
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