Buoyed by soaring global energy prices, the state-owned Oil and Natural Gas Corporation (ONGC) should have a solid foundation to increase investment over the next 12 to 18 months on the back of healthy earnings, said S&P Global Ratings. “Improved cash flow continues to support the rating” of ONGC, it said in a statement.
While the ONGC obtains a price equivalent to international oil rates for the crude oil it produces from fields such as Mumbai High, the government sets the price of natural gas based on a formula that takes into account global indices. As oil prices hover at multi-year highs, gas prices for ONGC have also risen to an all-time high of $6.1 per million British thermal units.
“CGSB will spend more than 60% of its improved cash flow on capital investments over the next few years. We expect the company to spend between Rs 55,000 and 60,000 crore in the 2023 financial year (ending March 31, 2023), compared to less than Rs 45,000 crore it spent annually in the over the past two years given the difficult trading conditions,” he said. Of this amount, ONGC intends to spend Rs 31,000 crore over the next three years on exploration activities, compared to nearly Rs 21,000 crore in the past three years.
“This increase will offset the company’s recent production decline to 43.4 million tonnes of oil equivalent (mmtoe) in fiscal year 2022 from 48.25 mmtoe in fiscal year 2020. We expect that these investments will also contribute to earnings resilience if prices begin to decline,” S&P said. . ONGC is also likely to maintain a healthy distribution of dividends to shareholders, he said.
“The company paid around Rs 13,000 crore in dividends in the 2022 financial year, which equates to around 30% of its free cash flow from operations. ONGC has shown good flexibility in the past when it cut dividends to around Rs 3,000 crore in the 2021 financial year due to the tough trading conditions. However, given the good earnings outlook, we expect the company to maintain its stated financial policy of returning 40-50% of net profit to shareholders,” he said. The rating agency said favorable crude oil prices will support ONGC’s earnings over the next 12 months and support increased investment.
It revised its forecast for the price of Brent crude oil for the remainder of 2022 to $90 a barrel and $75 a barrel for 2023. That compares to around $76 a barrel that ONGC made in the fiscal year. 2022.
“The recent natural gas price increase in India will also boost earnings. The formula-determined price increased to $6.1 per million British Thermal Units (mmbtu) for the first half of FY2023 from $2.90 per mmbtu previously,” he said. Crude oil and gas contribute nearly equally to ONGC’s overall production volumes.
“We expect ONGC’s earnings to increase 20-25% in fiscal 2023 compared to fiscal 2022. We also estimate the company’s operating funds to debt ratio to remain at 55 to 60% in fiscal year 2023 compared to our estimate of 50-55 percent. cent in fiscal year 2022,” he added.
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