Oil & Natural Gas Corporation Limited (ONGC), Reliance Industries Limited (RELIANCE): A Brighter Future for India’s Upstream Energy Sector

Page 1 of 2

India’s leading oil and gas explorer Oil & Natural Gas Corporation Limited (NSE:ONGC), or ONGC, has recently reported a steep decline in quarterly earnings as it sold its output at significant discounts. The company has been suffering from aging fields as the exploration-related write downs rose by one-third from the same quarter last year to $850 million while depreciation charges doubled to $423 million in the same period. Moreover, Brent crude prices also did not help, and averaged $112.64 during the quarter, showing a decline of 5% from last year.

Reliance Industries Limited (NSE:RELIANCE)On the other hand, Reliance Industries Limited (NSE:RELIANCE), the owner of the world’s largest refinery located in western India, has posted a 32% increase in quarterly income to $990 million. However, unlike ONGC, Reliance Industries Limited (NSE:RELIANCE) is largely a refiner, which is a higher margin operation. In fact, like ONGC, Reliance Industries Limited (NSE:RELIANCE) has struggled with its oil and gas production business as the unit’s quarterly revenue dropped 39%. Its income from converting crude to refined products, however, rose 33% to $10.10/barrel. As a result, the business ended up with increasing profits despite recording a 1.2% overall drop in sales.

Oil & Natural Gas Corporation Limited (NSE:ONGC) and Reliance Industries Limited (NSE:RELIANCE) have significant representation in PowerShares India ((NYSEARCA:PIN) and the WisdomTree India Earnings Fund (NYSEARCA:EPI), both exchange-traded funds (ETFs). The two firms are among the top-three holdings in both of these ETFs. The PowerShares India portfolio ETF is energy focused and devotes 25.6% of the funds to this sector while WisdomTree India Earnings Fund ETF is financials-focused with total sector weight of 25.4%. But the energy sector isn’t far behind with a weight of 19.8% of the funds.

Oil & Natural Gas Corporation Limited (NSE:ONGC)’s strategy is to increase its domestic and international reserves and output. For this reason, it has increased its capital expenditure budget by 18.8% from last year’s $5.2 billion to the current $6.2 billion. The company also has a very ambitious target to spend $195 billion by 2030 on building reserves and increasing production. From this perspective, the drop in profits will put pressure on its cash reserves.

In the last fiscal year, ONGC’s total output was approximately 51.4 million tons of oil equivalents, which it expects to increase by 1.9% to 52.5 million tons. I believe that the target is modest but it is realistic. ONGC has recently announced two new discoveries of which the KG basin field will start production within three years.

India’s oil and gas sector has witnessed government reforms that have largely been received well. India, much like China, was keeping a lid on oil prices to tackle the rising inflation and as a result, Oil & Natural Gas Corporation Limited (NSE:ONGC) was forced to sell crude at steep discounts to refiners.

However, the government has increased diesel prices while refiners are given more freedom to set their own price. I believe that this will reflect positively in the coming quarters as the current levels of subsidy that ONGC gives to refiners, which was approximately $2.2 billion in the previous quarters, will fall.

Page 1 of 2
Comments
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

The Best B-Boy Movies

Most Awesome Hip Hop Documentaries

Foods That Stain Your Teeth

Richest Doctors in the World

The Best Movie Sountracks Ever

The Highest Grossing Musicals on Broadway

The Most Successful Reality TV Stars

Cheapest Cities to Visit in the US

Most Expensive Summer Camps

Most Expensive Animals in the World

Most Expensive Specialty Crops in the World

Movies That Took Ages to Make

The Longest Hollywood Films Ever Made

Most Expensive Concert Stages

The Richest Bands of all Time

10 Most Corrupt Countries 2013 List

10 Countries with the Highest Quality of Life Index

Most Expensive Mattresses in the World

5 Smallest Countries by Land Area

The Ultimate Heartbreak Songs

Richest Teenagers in the World

10 Most Haunted Places in America

10 Best Places to Retire in Florida East Coast

Top 10 Places to See Before You Die

Top 8 Countries in the World Where Justice Prevails

10 Richest States in America

15 Wealthiest Countries in the World

Richest Singers in the World

Most Expensive Tasting Menu in New York City

Most Expensive Baby Items in the World

Most Expensive Hotel Suites in Vegas

Most Expensive Brunch in New York City

Most Expensive Beef Cuts in the World

25 Best Colleges to Get a Job

Top 10 US Supermarkets

The 25 Most Dangerous Cities in the World to Visit

Most Expensive Xbox Games

Top 11 Cities Where Billionaires Live

Top 10 Most Charitable Companies in America

Most Expensive Seafood in the World

The 10 Wildest Conspiracy Theories

The 10 Best Job Markets in the US

Top 10 Accounting Scandals of All Time

The 25 Biggest Cities in the World

Top 10 Best Paying Virtual Jobs

Most Expensive Leather Shoes in the World

Top 6 Things to Buy in March

The 10 Most Stressful Jobs in America – 2014 List

Top 10 Jobs for Introverted People

Top 10 Honeymoon Destinations in the World

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!