In Monday’s intraday trades, the share price of Oil and Natural Gas Corporation Ltd (ONGC) experienced a gain of up to 1.1%, even as benchmark indices trended in the red. Despite the softening of Brent crude prices, analysts continue to hold a positive outlook for upstream oil producers, anticipating stable net realizations for ONGC. The company’s increasing production is seen as a potential catalyst for additional earnings, complemented by a strong dividend yield.
ONGC’s share price reached 52-week highs last week and remains close to those levels.
While the recent decline in crude prices might suggest a decrease in net realizations for the oil producer, the introduction of a windfall tax by the government has stabilized net oil realizations for ONGC. These windfall taxes, adjusted every fortnight based on crude oil movement, prevent drastic fluctuations, maintaining net realizations around similar levels for oil producers.
Analysts at JM Financial Institutional Securities have affirmed positive ratings and a target price for ONGC and Oil India Ltd, emphasizing a strong dividend play (6-8%). They note that the current market price discounts $55-60 a barrel net crude realization, while their target price is based on an estimated $65 a barrel net crude realization. Changes in windfall tax indicate government acceptance of ONGC and Oil India achieving a net crude realization of $75 a barrel. A Brent crude price range of $75-80 a barrel is considered advantageous for ONGC and Oil India, reducing the risk of ad hoc fuel subsidy burdens, according to JM Financial.
Brent crude oil prices, which had approached $100 a barrel in September, have since eased to around $80 a barrel.
For ONGC, beyond oil realizations and a robust dividend yield, an increase in production could prompt earnings upgrades. The company anticipates the commencement of production in the KG-98/2 fields by November 2023, with a peak production target of 10mmscmd gas and 45,000 barrels per day crude oil in FY25. Elara Securities India Pvt Ltd analysts highlight a projected 5% increase in standalone crude oil production and a 14% rise in natural gas production over FY24-26, with a corresponding 12% increase in standalone EBITDA during the same period.