Why JPMorgan Raised Earnings Estimates, Price Targets For ONGC
The ONGC plant in Uran, Maharashtra. (Photographer: Dhiraj Singh/Bloomberg)

Why JPMorgan Raised Earnings Estimates, Price Targets For ONGC

Oil & Natural Gas Corp. fared among the top performers on the Nifty 50 after JPMorgan raised its earnings estimates and price targets for the oil explorer amid rising crude prices.

The global financial services provider maintained its ‘overweight’ rating on ONGC’s stock, and hiked its price target to Rs 190 apiece from Rs 145, implying a potential upside of 65% from Friday’s closing, according to a note.

The OPEC meeting last week, JPMorgan said, had the most bullish of all expected outcomes. The meeting saw Saudi Arabia not only maintain its voluntary one million barrels per day cut for the third straight month, but other allies of the OPEC+ also agreed to not increase production.

“The sum of restrained supply, along with rising demand will open a 1.8-million-barrels-per-day deficit gash in the oil market over the next three months,” JPMorgan said. It expects the alliance to maintain 4-5 million barrels per day out of its January 2020 production cut until demand recovery is fully validated, in the middle of 2022.

This path, according to the research firm, suggests that Brent oil price should average at $68-69 a barrel over the middle quarters of the year, break above $70 in September and exit the year at around $74.

JPMorgan expects oil prices to peak at $80 per barrel in the second quarter of calendar year 2022. “We increase our Brent price assumption from $50 a barrel to $60, and while we build in higher production costs and flattish oil and gas production volumes, overall our EPS forecasts [for ONGC] increase by 46% for FY22 and 32% for FY23,” the note said. It expects large consensus earnings upgrades if oil prices sustain at current levels. “Our EPS upgrade drives our price target increase to Rs 190 per share from Rs 145 earlier.”

JPMorgan sees few bottoms-up catalysts for ONGC other than a potential floor or change in gas pricing policy. “We do not see large production increases either in oil or gas at ONGC in the next two years as benefits from KG 98/2 will likely come only from FY23,” it said. “The only catalyst we see is any change in gas pricing policy for the APM (administered price mechanism) fields, which allows for some sort of floor pricing versus the current pricing regime, under which gas prices have fallen sharply.”

The research firm retained ONGC has its “top down oil call”.

Shares of ONGC gained as much as 6.4% as of 10:30 a.m. on Monday to Rs 122.35 apiece—the highest in more than a month. Of the 31 analysts tracking the company, 22 have a ‘buy’ rating, four suggest a ‘hold’ and five recommend a ‘sell’, according to Bloomberg data. The stock crossed its 12-month consensus price target of Rs 117.8 on Monday.

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