ONGC's Q2 Performance: A Mixed Bag Amid Global Headwinds
Shares of India's state-owned Oil and Natural Gas Corporation Ltd (ONGC) have shown little movement over the past year, reflecting investor concerns over lower crude oil prices and stagnant production volumes. The company's financial results for the September quarter (Q2FY26) have done little to alter this narrative, presenting a picture of resilience in some areas overshadowed by significant challenges in others.
Financial Performance and Key Metrics
The company's standalone EBITDA, excluding foreign exchange transactions, saw a decline of approximately 3% year-on-year, settling at ₹17,700 crore for the quarter. This dip occurred despite a positive contribution from improved gas realizations and a marginal increase in sales volumes. The primary culprits were falling global crude oil prices and a rise in operating expenses, which collectively weighed down the bottom line.
ONGC's standalone revenue for Q2FY26 also contracted, falling 2.5% to ₹33,000 crore. A critical factor was the average crude oil realization, which dropped 14% to $67.3 per barrel compared to the same period last year. When measured in Indian rupee terms, the decline was a slightly softer 10%, cushioned by the depreciation of the rupee against the US dollar.
Gas Business: A Silver Lining
The gas segment provided some relief. The price for gas sold under the government's nomination formula increased to $6.75 per million British thermal units (mmBtu) from $6.5 per mmBtu in Q2FY25. Furthermore, this price is set to rise by another $0.25 per mmBtu starting next April.
While the price for gas from new wells (NWG) fell by 11% to $8.4 per mmBtu, this was offset by higher sales volumes. Consequently, total gas revenue witnessed a healthy 12% increase. The total sales volume of oil and gas combined rose by 3% to 8.7 million tonnes of oil equivalent (mmtoe). New Wells Gas currently contributes 13.4% of the total gas volume, a share expected to grow significantly to 30-35% over the next 3-4 years as new fields become operational.
Production Struggles and Revised Outlook
A persistent challenge for ONGC has been accelerating its production. The company's production for the first half of FY26 (including its share from joint ventures) stood at 20.4 mmtoe, marking a slight 0.2% decrease compared to the previous year. In light of this, the management has prudently lowered its full-year FY26 production guidance to 40 mmtoe from the earlier projection of 41.5 mmtoe. For context, ONGC's production in FY25 was 41.1 mmtoe.
This performance has prompted a reassessment by market analysts. Nomura Global Market Research, for instance, has cut its consolidated earnings per share (EPS) estimates for ONGC by 14% for FY26 and 17% for FY27, factoring in lower volumes and crude realizations.
Subsidiary Performance and Future Catalysts
There were bright spots, however. ONGC's petrochemicals subsidiary, ONGC Petro-additions Ltd (OPaL), reported a remarkable turnaround, posting an EBITDA of ₹210 crore against a loss of ₹10 crore in Q2FY25. OPaL's profitability is projected to improve further as its capacity utilization is likely to surpass 90%, up from about 80% in Q2.
Another positive for ONGC is its 60% stake in Hindustan Petroleum Corp. Ltd (HPCL), which is experiencing strong earnings growth, partly aided by the low crude price environment. This provides a valuable counterbalance to ONGC's upstream challenges.
Looking ahead, management has identified several near-term catalysts. The Daman field development is ahead of schedule and is expected to start contributing to production by the fourth quarter (Q4). In the crucial KG Basin, the construction of offshore living quarters is slated for completion by January, which will facilitate a ramp-up in gas production. The basin is currently producing 3 million standard cubic meters per day (mmscmd) of gas, with expectations to increase this to 10 mmscmd by FY27.
Furthermore, British Petroleum (BP) has commenced work as a technical service provider on the Mumbai High fields and anticipates improved recovery rates from January onwards. Analysts at JM Financial Institutional Securities estimate that ONGC's production will grow by about 6% over the FY26-28 period, driven primarily by developments in the KG Basin and Western offshore blocks.
Currently, ONGC stock trades at an enterprise value of 4.7 times its estimated EBITDA for FY26, according to Bloomberg data. In a subdued crude price environment, a sustained improvement in production volumes remains the most critical factor for a potential re-rating of the stock. As highlighted in a JM Financial report, every $7 per barrel movement in net crude realization can impact the company's EPS and valuation by 12-18%, underscoring the stock's sensitivity to oil price fluctuations.
