Riding on the back of surge in global energy prices, state-owned Oil and Natural Gas Corporation (ONGC) should have a solid base to increase investments over the next 12-18 months on account of healthy earnings, S&P Global Ratings has said. “Improved cash flow continues to support the rating” of ONGC, it said in a statement.
While ONGC gets price equivalent to international oil rates for the crude oil it produces from fields such as Mumbai High, the government fixed price of natural gas based on a formula that factors in global indices. While oil prices are hovering at multi-year high, gas prices for ONGC too have risen to best ever rate of USD 6.1 per million British thermal unit.
“ONGC will direct more than 60 per cent of its improved cash flows to capital investments over the next few years. We expect the company to spend Rs 55,000-60,000 crore in fiscal 2023 (ending March 31, 2023) compared with less than Rs 45,000 crore that it has spent annually for the past two years in view of challenging business conditions,” it said. Of this, ONGC intends to spend Rs 31,000 crore over the next three years on exploration activities, compared with close to Rs 21,000 crore for the last three years.
“This increase will offset the decline in the company’s recent production to 43.4 million tonne of oil equivalent (mmtoe) in fiscal 2022 from 48.25 mmtoe in fiscal 2020. We anticipate these investments will also aid earnings resilience if prices start to decline,” S&P said. ONGC is also likely to maintain healthy dividend distribution to shareholders, it said.
“The company paid about Rs 13,000 crore in dividends in fiscal 2022, equivalent to about 30 per cent of its free operating cash flows. ONGC has shown good flexibility in the past when it scaled back dividends to about Rs 3,000 crore in fiscal 2021 due to the challenging business conditions. However, given the healthy earnings outlook, we expect the company to maintain its stated financial policy of returning 40-50 per cent of net income to shareholders,” it said. The rating agency said favourable crude oil prices will support ONGC’s earnings over the next 12 months and underpin the increased investments.
It revised its forecast for Brent crude oil price for the rest of 2022 to USD 90 per barrel and USD 75 a barrel for 2023. This compares with about USD 76 per barrel that ONGC realized in fiscal 2022.
“The recent increase in India’s natural gas price will also boost earnings. The formula-determined price increased to USD 6.1 per million British thermal unit (mmbtu) for the first half of fiscal 2023 from the earlier USD 2.90 per mmbtu,” it said. Crude oil and gas contribute almost equally to ONGC’s overall production volumes.
“We expect ONGC’s earnings will increase 20-25 per cent in fiscal 2023 over fiscal 2022. We also estimate the company’s ratio of funds from operations to debt will remain 55-60 per cent in fiscal 2023 compared with our estimate of 50-55 per cent in fiscal 2022,” it added.
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