ONGC Project Delays, Flat Oil Output a Worry

India’s biggest oil and gas producer, the state-owned ONGC, is losing favour among the analyst community due to concerns over production growth. The expected revision in natural gas prices could be the only positive trigger for the stock and for investors, the upside would be only in the long term. According to the data compiled by Bloomberg, the percentage of analysts recommending a ‘buy’ on ONGC has come down to 67% in June from over 73% in May. The reason appears to be two-fold. ONGC’s results for the March quarter, published on May 29, turned was disappointing in spite of a benign subsidy burden. This was mainly due to the jump in exploration costs. “4Q exploration costs at . 4,740 crore were above our expectations of about . 3,000 crore,” said a Goldman Sachs report on the earnings. The second reason is more chronic in nature. ONGC has faced a prolonged stagnation in crude oil production. “ONGC’s crude production declined to 22.6 million tonnes in FY13 from 23.7 MT in FY12, while gas production remained flat at 23.6 billion cubic meters… its crude production in particular has declined at 2% CAGR in the last eight years,” said Jefferies. FY14 was supposed to be a turnaround year for the company’s output, but delayed projects are making analysts cautious. “ONGC has progressively cut its FY14 domestic oil output target, but still reiterated 25.3 million tonnes in its recent analyst meeting. Our forecast that follows from the state of its 40 projects is 7.5% lower at 23.4 MT,” said a research report from Barclays Capital. Apart from the natural gas price hike, it is production growth that will act as a catalyst to the company’s share price. ONGC is working on several projects that include intensive or enhanced oil recovery (IOR/EOR) for its old fields apart from bringing several marginal fields under production over the next 2-3 years. This should help the output rise by an average of 5%-6% each year between FY14 and FY16. However, the biggest gains would come only in FY15 and FY16. Retail investors should be prepared to wait for 2-3 years for a meaningful upside in the scrip.