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Why ONGC And OIL Are On Analysts' 'Buy' Lists

ONGC and Oil India have outperformed the Nifty 50 and BSE Oil & Gas in the past few months.

Emissions rise from chimneys at the Oil and Natural Gas Corporation Ltd. (ONGC) Uran plant in Uran. (Photographer: Dhiraj Singh/Bloomberg)
Emissions rise from chimneys at the Oil and Natural Gas Corporation Ltd. (ONGC) Uran plant in Uran. (Photographer: Dhiraj Singh/Bloomberg)

India’s two listed oil explorers have outperformed the benchmarks over the past few months to hit multi-year highs, deriving optimism from higher crude and gas prices that have prompted earnings upgrades.

In the last one month, Oil & Natural Gas Corp.’s adjusted earnings per share estimates for FY22 and FY23 were upgraded by 4.7% and 10.9%, respectively, according to forecasts compiled by Bloomberg. For Oil India Ltd., they were raised 24.3% and 19.6%.

That comes as the Brent crude hit a three-year high at $82.6 a barrel after OPEC decided to stick to a plan of slow-and-steady supply increases. Asia’s benchmark for oil has gained more than 55% so far in 2021. ICICI Direct expects it to average $72.9 in FY22 and $70 in FY23.

India, too, increased the administered price of natural gas by 62% to $2.9 a million metric British thermal unit for the second half of the ongoing fiscal. The price of gas from difficult fields was also raised by 69.3%. UBS expects a further increase in FY23 to $4.7–5.7 a unit.

“The increase in domestic gas prices will boost the profitability of upstream companies in the country and support their investment spending,” Fitch Ratings said in a report. It expects ONGC’s net leverage--or net debt-to-Ebitda--to improve to around 2.1 times in FY22 from 2.7 times in FY21 as upstream earnings recover, and downstream earnings stay resilient. Oil India’s leverage is seen at 1.9 times.

Reliance Industries Ltd.’s gas production from KG Basin, according to the rating agency, will also benefit from the higher price ceiling. But the impact on its financial profile is minimal as gas makes a limited contribution to its revenue.

  • Emkay Global estimates that for every $1 a mmBtu change in administered gas price, FY23 EPS of ONCG and OIL would change by 28.7% and 10.9%, respectively.

  • According to Motilal Oswal, every $5 a barrel increase in Brent would result in an EPS change of 8-11% for ONGC standalone and Oil India.

Higher crude oil and gas prices are also expected to improve net realisations—the price earned after subsidies—for the oil producers.

ICRA in its September report said the domestic crude production is expected to increase by about 2-3 million tonnes over the medium term from 30 million tonnes in FY21. Domestic gas production is also likely to go up. It expects overall credit protection metrics of domestic upstream companies to remain healthy over the medium term.

Shares of ONGC hit a 28-month high on Sept. 30, while Oil India jumped to the highest in six-and-a-half years, according to Bloomberg data. The stocks even beat the Nifty 50 and BSE Oil & Gas indices in the past few months.

Still, ONGC and OIL India trade at a discount to Nifty 50 and BSE Oil & Gas on forward earnings.

Brokerage Views

ICICI Direct On ONGC

  • The ramp-up in oil and gas production from newer fields, value unlocking from subsidiaries, sustained higher crude oil prices and gas realisations, and high dividend yield are key triggers for future stock price performance.

  • Maintains ‘hold’ with a target price of Rs 185, an upside potential of 10%.

Motilal Oswal On ONGC

  • ONGC’s gas production is likely to clock 7% CAGR over FY21-24E, with efforts to arrest the decline in oil production.

  • Rates ‘buy’ with a price target of Rs 190, an upside potential of 13.02%.

Motilal Oswal On Oil India

  • The company is targeting 5 mmscmd of gas from the Baghjan field in Assam, up from 1.6 mmscmd currently, over the next three-five years.

  • In FY21, it has increased its acreage by 13%.

  • Values the stock at 8 times September 2023E adjusted EPS.

  • Rates ‘buy’ with a price target of Rs 310, an upside potential of 24.8%.