ONGC share price : Will it ever rally?

ONGC Share Price: Always in the news

ONGC has roughly 1% weightage in Nifty 50, being a Public Sector Company (Indian Govt is the majority shareholder), and having an oil-related business is always in the headline. The most recent ONGC share price driving headlines were related to the Ukraine war, the Indian Government’s surprise tax on oil exports, and significant volatility in crude oil prices at International Exchanges. 

Russia-Ukraine war and ONGC share price

The War in Ukraine has impacted the commodities trade and their prices - oil being one of them. The crude oil price has crossed $100 per barrel since the war started in February 2022 - this has benefitted the energy companies engaged in oil explorations and exports. ONGC share price rallied from Rs. 156 per share to Rs.194.95 - a sharp 24% jump in 10 trading days.

Tax hike on oil export and ONGC share price

At the beginning of July, the Government implemented an excise duty of Rs. 23,250 per tonne on crude oil production. The Government also announced an increase in export taxes and restrictions on exports of petrol, diesel and aviation turbine fuel (ATF) to ensure more domestic uses. Due to these two factors, there was a 25% fall in ONGC share price from Rs. 155 to Rs. 121. 

Oil price volatility and ONGC share price: 

There is a fear of an upcoming recession - because of which Brent Crude Oil prices have been massively volatile. Just within the second week of July 2022, ONGC share price slipped by 21%. 

ONGC share price: How has it moved in the last 5-years?

ONGC is considered the biggest Oil and gas corporation in the country. Why is ONGC share price still negative?

ONGC share price has not been moving in a positive direction for its investors. The ONGC share has generated negative returns in the last 5-years and 3-year periods. In the year 2022 also, the share price is trading in the negative zone. 

5-year performance of ONGC share price: Negative 23%

3-year performance of ONGC share price: Negative 15%

1-year performance of ONGC share price: Positive 9%

6-month performance of ONGC share price: Negative 23%

1-month performance of ONGC share price: Negative 16%

Performace as on 14th July 2022

Major triggers of fall in the ONGC share price

• In 2015, ONGC suffered a loss of Rs. 7,995 Crores due to poor planning in hiring and the use of drilling rigs. In their preparation for the annual rig requirement plan (RRP), they had an inefficient repair policy and inconsistent deployment. According to the Comptroller and Auditor General of India (CAG), rs. 6,418 of the loss could have been avoided by the company. 
• After the Government mandated rates for fuel dropped to a decade low in 2020, ONGC lost 6,000-7,000 Crores on its natural gas business. The Government mandated rates were below the cost of production.
• After the government announced export duties on oil products to increase domestic supplies, ONGC suffered a major loss. This in addition to the windfall tax on crude oil resulted in the erosion of Rs.25,800 crore of investor wealth. In the last 1-month itself, ONGC share price has reduced by more than 16%. 

What do analysts have to say about ONGC share price?

• After the initial increase in crude oil prices, analysts at HDFC securities believed that it was a ‘buy’ with a target price of Rs.220.
• Because of the windfall tax, brokerage firm JP Morgan downgraded the stock of ONGC from ‘buy’ to ‘neutral’. They have cut the target price by 26% as it sees a cut in its earnings going ahead. Analysts believe that the imposed tax will be negative for the company as it is a fixed quantum that actually depends on the sales of the company.
• Analysts at Motilal Oswal Financial Services have cut their estimated price share of ONGC by 29% for FY23. They gave it a ‘buy’ rating but revised the price to Rs.171. According to them, a continuation of the windfall tax is a risk even if prices fall below $100 per barrel.
• According to Business Insider, the main reason for the fall in the ONGC share price is the windfall taxes - this will hurt the profitability in the coming quarter.
• According to many other analysts, these taxes are negative for the refineries including ONGC and will impact the profitability in a negative manner.

In July 2022, ONGC shares fell sharply after the govt announced a tax hike on petroleum products export. You can read here to check out its impact in detail.  

Let Us Look at the Overall Business of ONGC

After independence, the government realized the significance of oil and gas when it comes to industrialization and defense. ONGC is a government-owned crude oil and natural gas corporation, under the Ministry of Petroleum and Natural Gas. Its headquarters are in New Delhi. ONGC was established in 1959 and in 1993 it was incorporated under the Companies Act 1956 after a statutory commission named Oil and Natural Gas Commission was converted into a public limited company. It is a Navratna company with 74.14% shareholding of the Government of India. 

The company essentially derives its revenues from the sale of its production of crude oil, natural gas, liquefied petroleum gas (LPG), C2-C3 (ethane propane), and natural gasoline (NGL).

*Others- C2-C3, NGL, etc. 

Between 2002-2003 ONGC acquired MRPL from the A V Birla Group and diversified into the downstream sector. It also made its way to the global field through its subsidiary ONGC Videsh Ltd. (OVL).  Post this announcement ONGC stock tanked 12%. 

In 2018, it acquired a 51.11% stake in Hindustan Petroleum Corporation Limited (HPCL). It is the only public sector company that has featured in Fortune's Most Admired Energy Companies List. 

Currently, it ranks at 815 among the most valuable companies in the world with a market capitalization of $20.05 Billion.

ONGC: Key Valuation Rating Metrics (2021-2022 comparison)

Between 2021 and 2022, ONGC earned the best it ever had in the production of crude oil, making it the second highest profitable company after Reliance Industries. The net profit increased from Rs. 11,246 Crore to Rs. 40,305 Crore. This happened because international crude oil prices started spiking from the end of 2021 and increased to a 14-year high after Russia invaded Ukraine. International crude oil prices also hiked in 2008 but ONGC's net profit was lower as it had to provide subsidized fuel rates to retailers. Downstream retailers are now pricing petrol and diesel at international rates because of which ONGC now gets global rates.

Key financial parameters of ONGC:

ONGC: Subsidiaries Comparison

• In 2018, ONGC acquired Hindustan Petroleum Corporation Limited for Rs.36,915 Crores. This was done with the objective of expanding ONGC’s explorer base rapidly. HPCL has been seen as a good investment by analysts due to its strong growth and good management team as well as a business model. 
• MRPL, Mangalore Refinery, and Petrochemicals Ltd. is a subsidiary of ONGC. ONGC holds a 71.63% stake in MRPL. MRPL suffered a loss of Rs. 86 Crore due to the lack of crude oil demand during Covid-19. After the devastation, MRPL hit its highest level since 2018 in June 2022. 
   

ONGC: Macroeconomic Backdrop, market Cycle, and Sector Analysis

Since India is primarily dependent on oil imports, the war between Russia and Ukraine has surged oil prices and increased inflation in India. The Indian economy was estimated to grow 8.2% between 2022 and 2023, which is now down 0.8%. Crude oil prices have surged to the highest since 2008 and the Indian rupee also hit a lifetime low of Rs.79 against the US dollar. This jump in oil prices is said to increase India’s current account deficit and the rate of inflation. 

The shares of companies like Reliance and ONGC have fallen sharply since the government announced an Rs.6 per liter tax on the exports of petroleum and aviation turbine fuel and Rs.13 per liter on diesel exports. The government also implemented an Rs.23,000 per ton tax on domestically produced crude oil. This means that Indian exporters will be forced to sell at least 50% petroleum in the domestic markets before exporting. 

According to reports, in the first half of June, imports of gasoline increased to 13,000 barrels a day which is a seven-month high. Diesel imports are predicted to surge to 48,000 barrels daily, the highest since February 2020. In the fiscal year of FY22, 19.5 million tonnes of Crude oil was produced by ONGC which was 3.62% less than the previous fiscal year’s output and 13.82 % lower than the set target. 

This is due to the heightened international product prices. It has encouraged India’s private refineries to boost exports due to which processors are trying to address extra imports. 

ONGC share price has been largely impacted by the movement in crude oil prices. 

A hike in the Crude oil prices led to a massive gain of $45-47 per barrel because of which the government is looking to take a part of it. Private oil refining companies were acquiring huge gains by exporting fuels to markets such as the US and Europe in the midst of increased international oil prices. This move is intended to take away the gains accruing to producers from the high oil prices. The tax also helped meet the demands of the domestic market.

Petroleum Sector in India

The government has issued oil bonds to compensate the oil marketing companies due to the losses they suffered in regard to the rise in crude oil prices. The government has tried to fix the petroleum and diesel prices with the intention to shield consumers from the shock of high prices. The current value of the bond is said to be 92,200 crores which are said to be maturing between 2023-2026.

India’s reliance on imports for petroleum products has risen over the years. From 1989-1999, net imports were 69% of the total consumption which became 95% in 2021-2022. Due to this reliance on imports for domestic consumption any change in the global price of crude oil has an impact on the domestic price of petroleum products.