Globally, energy producers have been the biggest beneficiary of the supply disruptions and an unprecedented rally in energy prices in 2022. In India, although crude oil is predominantly imported, ONGC and Oil India are the major domestic producers, contributing only a fifth of the country’s total oil requirements. The remaining balance is imported, with minor contributions from other players.

Regarding gas, about half of the requirement is produced locally, while the balance is imported. ONGC, Oil India and Reliance Industries are key producers of gas in India. Gas prices in India have witnessed a whopping increase over the past year.. The domestic natural gas price rose from USD 2.9 per mmbtu in October 2021-March 2022 to USD 6.1 per mmbtu in April-September 2022, and further surged to USD 8.57 per mmbtu in October 2022-March 2023.

The record high gas prices in FY23 will benefit Oil India and ONGC which will announce Q4FY23 results this week.

Oil India: buoyed by gas

Thanks to the skyrocketing gas prices, Oil India’s gas segment, which accounted for 30 per cent of the consolidated profit, reported an operating profit of ₹1,091 crore on a revenue of ₹1,660 crore, implying a whopping margin of 66 per cent for the October-December 2022 period. This is in contrast to the loss of ₹107 crore on revenue of ₹514 crore in the October-December 2021 period. For the 9MFY23 period, the gas segment profit was a massive ₹2,029 crore compared to ₹540 crore the previous year. We expect the company to report similar profits in the gas segment in 4QFY23 as well. Given that crude has also remained in the USD75-85 per barrel range for the quarter, the Numaligarh refinery and crude exploration business should also continue to report healthy performance in Q4FY23.

Likewise, ONGC which has benefitted from strong gas prices in India over the last two quarters, should continue to show that in the January-March 2022 quarter results as well.

However, the crude realization in the January-March 2023 period may be a tad lower for ONGC compared to the same period last year as crude prices rallied from USD 80 per barrel levels to over USD 100 per barrel (Brent crude) between January and March 2022.  Also, the impact of windfall tax, though not material, will be there in the 4QFY23 performance. The windfall tax on crude has been reduced to a tenth in January 2023, compared to July 2022.

ONGC as a company does not provide the breakup for its crude oil and gas exploration business, but instead reports offshore and onshore revenue and profits. In the nine-month period ended December 2022, the profitability in the offshore segment has dwindled from 53.7 per cent in the October-December 2021 period to 48.3 per cent in October-December 2022 period. However, the onshore margins have improved by about 3 percentage points during this period to 17.2 per cent.

That said, for the 4QFY23 quarter, we expect the gas segment to partially compensate for the weakness in the oil exploration business performance. Our back of the envelope calculation reveals that for every USD 1 per mmbtu incremental gas price realisation, the quarterly accretion to revenue and profits would be ₹1,807 crore. This assumes quarterly sales of 5.5 billion scm.

Until April this year, the government would announce domestic gas prices bi-annually, and the price was derived using the gas price and consumption across several nations such as Canada, Europe, Russia, China.

However, beginning this financial year, the exchequer approved the new pricing norms recommended by Kirit Parikh committee, wherein the price of gas will be 10 per cent of India’s crude basket price for the previous month, with a floor price of USD 4 per mmbtu and a ceiling of USD 6.5 per mmbtu for gas from older wells, also called nomination fields.

HPCL: drag to boost

Also, the refining business – HPCL - reported strong performance for the quarter, with a whopping 80 per cent growth in net profit to ₹3,600 crore. ONGC’s 54.9 per cent stake in HPCL, which was a drag on the 9MFY23 performance, will lift the consolidated performance for the March 2023 quarter.

We have a buy rating on the stock of Oil India, as we are positive about the expansion at the Numaligarh refinery and the potential upside from that, in addition to the new gas pricing policy that will render stability to earnings. We have an accumulate recommendation on ONGC’s stock as we believe that the new policy for gas pricing will augur well for the company over the next 2-3 years