We update estimates for ONGC and Oil India post 4Q results. We note that despite the recent recovery in crude price, multiple issues such as concerns on production, higher cess announced in the Budget and lagged movement in domestic gas price have limited upside for these companies.
Another leg of crude price recovery to over $60/bbl can drive upside for ONGC, in our view. For Oil India, declining crude production in its core asset is a key worry.
Stagnant or declining production remain a major concern for ONGC and Oil India. ONGC’s crude production has remained stagnant for the last 4 years while its gas production has declined 10% in the last 2 years.
This is despite management indicating that 30% of its production in FY16 came from IOR/EOR and another 14% from new fields. Higher than expected natural decline in mature fields and delays in completion of projects have meant that ONGC’s production have been declining and have lagged targets over the last many years. We believe production decline is an even bigger worry for Oil India whose crude production declined 5% in FY16 alone and is down 16% from its peak in FY12. The Assam fields account for nearly 100% of its crude production and natural decline in these presents a key risk for Oil India.