Crude oil prices to hit upstream oil firms’ realisation
Business Standard reported that with global crude oil prices at a 6 and a half year low, upstream oil and gas companies like the state-owned Oil and Natural Gas Corporation and private sector Cairn India need to brace up for an impact on their realisations.
Tracking the sell-off in global equity markets, benchmark Brent crude on Monday fell below USD 45 a barrel for the first time since March 2009. Brent crude for October delivery fell USD 1.79 on London's Inter Continental Exchange to USD 43.69 a barrel. In response, while the stocks of ONGC, Oil India and Cairn India fell to 52 week lows, they recovered slightly on Tuesday with the three closing 1.5%, 2.6% and 2.8% higher, respectively, following a marginal improvement in global crude prices. Brent crude also settled 2.8% higher at USD 43.95 per barrel.
While upstream firms' realisations were impacted in the June quarter due to fall in oil prices, the easing of subsidy sharing burden meant net realisation impact were moderated
Mr Debasish Mishra, senior director at consultancy firm Deloitte, said that "However, with the oil prices coming down below USD 45 per barrel, their bottom-line will get hugely impacted in this quarter."
ONGC witnessed a 41% drop in its gross realisation to USD 63.8 per barrel in the June quarter. However, the silver lining was 91% fall in subsidy sharing to INR 1,100 crore, which resulted in net realisation to USD 58.9 per barrel compared with USD 47.2 per barrel in the same quarter last year.
With the crash in the global crude oil prices, the realisations would come under further pressure. The Indian basket of crude, which stood at USD 42 per barrel on Monday, has averaged around USD 51 per barrel since the beginning of the September quarter in July. Mishra said the recent developments are hinting at oil trying to find a new trading range and not going to bounce back to three digits in a hurry. Lower crude prices will reduce total under-recoveries and, as a result, ONGC's net oil realisation for the nomination fields will rise, equity research firm HDFC securities said in a recent report. It, however, added there are multiple overhangs for the company.
The report said that "The popular consensus for crude prices is that they will remain muted in the near term owing to shale oil supplies in the US, rise in output in Iran and a persistent focus on market share by the OPEC. ONGC Videsh and JV profits are directly linked to oil prices. Even ONGC profits will fall below the crude prices of USD 60 per barrel."
For Cairn India, an arm of the metals and mining giant Vedanta, the drop in crude prices translated into a 50% decline in net profit at INR 348 crore in the June quarter. Total income also dropped 41% to INR 1,619 crore. The company had in March announced a 58% cut in capacity expansion for the current financial year to USD 500 million. While announcing the June quarter results, Mr Mayank Ashar, CEO of Cairn India, had said that optimisation in capital cost of projects to improve economic viability in a low oil price scenario was among the key highlights during the quarter.
Source : Business Standard