ONGC beats Tata Steel, TCS to become India’s 2nd most profitable company - but Russian links may spoil the party

• Rising crude oil and gas prices during the last few quarters because of supply side constraints led by the Russia Ukraine crisis has benefited the oil producer to mint more money.
• ONGC enters the elite club of top most profitable companies in India as it makes a profit of ₹40,305 crore in FY22.
• The oil producer has surpassed Tata Steel, TCS and HDFC Bank to reach the second position wherein Reliance Industries holds top position.

State-owned oil explorer ONGC beat two Tata group firms - TCS and Tata Steel to become India’s second most profitable company, after Reliance Industries, in FY22.

Its record profits came in spite of decline in production for the last 11-18 quarters, aging fields, and lack of new discoveries. However, crude oil prices soared to almost $140 a barrel - making even its low output very valuable. ONGC contributes to 70% of India’s total oil and gas production.

“A rally in global crude oil and natural gas prices is a key driving factor behind ONGC’s profitability,” said a report by YES Securities. It added that any moderation in crude prices will affect its cash flows as its capex requirement is very high to maintain production in its aging fields.

ONGC reported a net profit of ₹40,305 crore for FY22 surpassing Tata Steel, by a decent margin. It also beat one of India’s most valuable companies - TCS in terms of profits - after crude oil prices soared.

Taxes, sanctions and more to affect ONGC profitability

As expected, this rise in profitability might be unsustainable, especially since analysts believe that Russia-Ukraine tensions could settle down, cooling off the soaring crude.

“ONGC’s performance depends on how long geopolitical tensions persist as its profits are directly connected to crude oil prices,” Sanjiv Bhasin, executive vice president, markets & corporate affairs at India Infoline, told Business Insider India. Bhasin believes that these tensions will ease by mid-July.

As soon as crude prices come down, so will ONGC’s place in the list of most profitable companies.

“Brent will not sustain the $110 kind of level. One or two years down the line, Brent will cool down. The two year future market also shows prices cooling off about $80-$90 per barrel range so that will definitely impact the margins for ONGC,” Anshuman Khanna, the founding director of Valpro, told Business Insider India.

While the advantages of the war might go away soon, its effects - like sanctions on Russia - could remain and can affect ONGC’s fortunes negatively.

The Russian connection

ONGC’s international arm, ONGC Videsh owns stakes in multiple energy assets in Russia. One of the country’s gas producing assets Sakhalin-I has already shown signs of trouble as US major Exxon said that it would exit the block. ONGC has a 20% stake in it, along with interests in Sakhalin II, and Vankor fields in Siberia.

“Russian assets are facing two issues -- one is the fact that Russian crude is trading at a discount about $10-$20 to Brent and second issue is repatriation of Russian dividend from these assets because of sanctions. It’s a real risk, which could jeopardize their entire Russian investment,” Anshuman Khanna, the founding directors of Valpro, told Business Insider.

The Indian government too isn’t allowing the state-owned oil explorer to enjoy its profits either. It is believed to collect some of it in the form of a windfall tax on oil producing companies. Analysts at Citi call this tax threat an overhang.

There is speculation that the government might impose a 25% tax on profits of oil and gas producing companies as crude prices have surged over 50% in 2022.

The stock has gained over the last one year, but does not reflect the positive impact of crude oil on its profits. The sanction risk and taxes are making its short-lived story of profitability even less enticing to investors.

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