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No Respite for ONGC, OIL
The outlook for crude oil prices has darkened once again after a meeting of Organisation of Petroleum Exporting Countries (Opec) and non-Opec members failed to reach an agreement on production freeze. Even if some agreement had been reached, it is debatable whether a mere freeze at current levels of production would have dramatically altered the fortunes of global oil markets. “Still, a production freeze would have brought some discipline in the markets, which would have ensured that the demand supply rebalancing expected by second half 2016 (mainly as US production declines) would have happened,” said Nitin Tiwari, analyst at Antique Stock Broking Ltd.
The uncertainty regarding the rebalancing of oil markets would now increase. That’s obviously bad news for state-run upstream oil companies—Oil and Natural Gas Corp. Ltd (ONGC) and Oil India Ltd. As expected, shares of these companies have underperformed the S&P BSE Oil & Gas index in the last one year. Data from Bloomberg shows that ONGC’s and Oil India’s one-year forward price-to-earnings ratio stands at about 10 times and 8.4 times, respectively. Sure, Oil India’s valuations seem relatively attractive. But then, as the chart alongside shows, Oil India has traded at lower valuations than ONGC.
According to analysts, lower liquidity in the Oil India stock is one reason for investors ascribing comparatively lower valuations. Also, Oil India’s production is concentrated in the North-East where blockades and political disturbances have often adversely affected production. In a note to clients in February, Arya Sen, analyst at Jefferies India Pvt. Ltd, pointed out that the management commentary seems to suggest that natural decline in many of its mature fields is not being compensated by workovers, EORs (enhanced oil recoveries) and contribution from new and marginal fields. Workover refers to techniques used to improve the productivity of oil wells that have produced for some time.
For the nine-month period ended December, Oil India’s crude production declined 5% year-on-year. “While the management expects production to stabilize around the current level of 3.2 million ton in FY17, we remain concerned about medium to long-term prospects given the natural decline in its core asset,” added Sen. So it all boils down to higher prices. Opec will meet again in June. But for now, in the near-term, there is little to suggest a stronger crude environment.
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