Crude touches its 11-year low, ONGC, Cairn dip further

Sliding of crude oil prices seems is not coming to an end making some happy and some anxious. And we are talking about the oil marketing companies and oil exploration and production entities, both on two different sides of the table, watching the crude prices touching its bottom in last 11 years closely.

Oil prices touched at USD 34.05 per barrel on December, 22 on commodity exchange. One and half year before oil prices was all time high around USD 110 per barrel. The predominant reason behind declining oil prices is global oversupply. As a major import material, oil prices play important role in Indian context. The exploration companies are in focus because of fall in oil prices. Oil exploring companies recently witnessed shrinking profit margins, forcing them to cut spending in investment and exploration.

Crude production from Indian exploration companies remained stagnant over the past few years. On financial front, exploration companies’ bottom line eroded almost 50 per cent in the last financial year. We are considering here ONGC and Cairn India to explore what is happening in these two major upstream oil sector companies. ONGC (Oil & Natural Gas Corporation), the exploration major witnessed PAT margin contraction of 197 basis points to 23.63 per cent in H1FY16.

Despite of falling oil prices, ONGC is planning to spend USD 176 billion by 2030, with a view to achieve energy security. Out of which, the company will spend Rs 100 billion in current financial year to drill 50 wells including 10 shale wells. Meanwhile, the spending will increase pressure on profitability margins, but according to company there is no other way out.

The gross crude oil under-recoveries(GURs) is a major factor which decides profitability of the oil exploration companies. ONGC's GURs declined by 45.94 per cent to Rs 75614 crore as of FY15. The lower GURs tend to decrease profitability margins. The government is intending to deregulate kerosene which may further reduce GURs in future.

Cairn India which is also an oil exploration company, facing bleeding of its top line and bottom line too. The company's revenue declined by 42.12 per cent to Rs 2602 crore and net profit also reduced by 71.46 per cent to Rs 516 crore during H1FY16 on yearly basis.

Production of crude oil by ONGC decreased by almost 13 lakh MT over the last five years to 2.59 crore MT as of FY15. ONGC's PAT margin too declined by half from 18.22 per cent in FY11 to 10.64 per cent in FY15. The PAT margin of Cairn India also reduced almost half from 61.63 per cent in FY11 to 30.59 per cent in FY15. 

Goldman Sachs and CLSA too also expecting crude oil prices to further decline to USD 20 per barrel. There are various reports from research houses also talking about crude oil will not go beyond USD 100. 

Over the last one year, ONGC and Cairn India share prices were quite in proportion with crude oil prices. The scripts are trending towards their 52 week low at Rs 230.7 and Rs 133.25 respectively on the bourses.