ONGC Limited: The Indian Energy Giant
Since its inception around 65 years ago, ONGC has played a critical role in transforming India’s upstream (oil & gas exploration) sector. With operations spread across the country and the globe, they ensure a steady supply of raw crude oil and gas. The PSU has recently ventured into the production of renewable sources of energy as well. Many are not aware of how big the company really is. In this article, learn more about ONGC and its recent financial performance.
Company Profile - ONGC
Oil and Natural Gas Corporation (ONGC) Limited is the largest producer of crude oil and natural gas in India. It was established in 1956 under the leadership of Pandit Jawaharlal Nehru. The Government of India (GoI) holds a majority stake (60.4%) in the company. ONGC comes under the administrative control of the Ministry of Petroleum & Natural Gas. It was conferred the ‘Maharatna’ status in 2010.
They primarily operate through two segments— Exploration & Production (E&P) and Refining & Marketing (R&M). The company has established itself as one of the leading oil drilling companies in our country. It operates around 104 oil drilling rigs and 74 workover (portable) rigs. ONGC contributes nearly 71% to India’s total production of crude oil. The crude extracted by the company is used as raw material by downstream companies such as Indian Oil Corp. (IOCL), BPCL, and HPCL. Moreover, ONGC contributes ~63% to the total gas production in our country.
The state-owned company extensively produces liquefied petroleum gas (LPG), ethane/propane, superior kerosene oil, aviation turbine fuel, and high-speed diesel.
Interestingly, ONGC is also one of the top wind energy companies in India. It owns and operates a 51 megawatt (MW) wind power project in Surajbari, Gujarat, and a 102 MW wind power project in Rajasthan. They also generate solar power through a total installed capacity of 23 MW. The ONGC Energy Centre (OEC) is developing innovative methods to generate hydrogen as well.
From the graph shown above, it is clear that ONGC’s revenues have been declining over the past two years. Profit figures are also highly inconsistent. A primary reason for this can be attributed to an increase in overall expenses. Amidst the Covid-19 pandemic, the company had faced a sharp rise in statutory levies (royalty and cess), exploration costs, and tax expenses. At the same time, ONGC could not efficiently use its budgeted capital expenditure (capex) for FY21. This was because the implementation of several key projects (including oil & gas exploration) got delayed due to strict lockdowns globally. The sharp fall in crude oil prices also affected ONGC’s margins.
ONGC’s Q4 and FY21 Results
ONGC posted a consolidated net profit of Rs 9,404.16 crore for the January-March quarter of 2021 (Q4 FY21). This is compared to a net loss of Rs 6,338.12 crore in the corresponding quarter last year (Q4 FY20)— the company’s first-ever quarterly loss. However, net profit had jumped 273.5% when compared to the previous quarter (Q3 FY21). The total income in Q4 FY21 increased by 9.45% YoY (or 15.42% QoQ) to Rs 1,18,206.16 crore.
The consolidated net profit for the entire financial year 2020-21 (FY21) increased by 49% YoY to Rs 16,248.69 crore. Total income fell by 8.5% YoY to Rs 3,71,833.46 crore in FY21. The Earnings Per Share (EPS) increased from Rs 8.67 in FY20 to Rs 12.92 per share in FY21.
Over the past five years, ONGC’s total revenue has grown at a CAGR of 19.44%, whereas the industry average stood at 18.73%. It has obtained a market share of 96.44% in India’s Exploration & Production (E&P) sector. The company’s Return on Equity (ROE) of 7.61% is very low when compared to its peers. Currently, the Return on Capital Employed (ROCE) is also low at 10.21%. It means that for every Rs 100 worth of capital employed, ONGC receives just Rs 10.21 on it.
- ONGC has declared a total of 10 discoveries (3 in onland, 7 in offshore) during the financial year 2020-21 (FY21) in its operating oil & gas acreages. Out of these, six are new prospects (1 in onland, 5 in offshore) and four are pools of existing finds (2 in onland, 2 in offshore).
- With the monetisation of ONGC’s Ashoknagar-1 discovery (oilfield), the Bengal basin has become the 8th sedimentary basin of India from which hydrocarbon has commercially been produced. Thus, the Bengal basin has been upgraded to a Category-I basin as per the new three-tier category classification of sedimentary basins in India.
- An official of the state-owned firm said they expect gas prices to increase by around 50-60% in the second half of FY22, which will help boost margins.
The Way Ahead
In 2019, the company had announced the adoption of a comprehensive roadmap for the future, termed as ‘ONGC Energy Strategy 2040’. They have set a target to double oil and gas output from its domestic and overseas fields. ONGC will work towards achieving a three-fold increase in revenue, distributed across the exploration & production (E&P), refining, and other businesses. The company has also targeted a four-fold increase in profit after tax (PAT), with a 10% contribution from the non-oil and gas business by 2040. They have prioritised the expansion of their oil refining capacity from 70 million tonnes per annum (MTPA) to 90-100 MTPA.
As mentioned earlier, ONGC is also focusing its efforts on developing and producing cleaner sources of energy (wind, solar, hydrogen, etc). The company plans to make large investments in these renewable energy sources with an aim to create a 5-10 gigawatt (GW) portfolio. Let us look forward to seeing how they implement these strategic plans.
ONGC’s shares have gained by ~46% over the past year. Most people invest in this public sector undertaking (PSU) for dividends. Fortunately, the company has been maintaining a healthy dividend payout of 38.12%.
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