Analyst Tracker: ONGC beats crude price volatility as top oil and gas pick for brokerages

As per Bloomberg data as of August-end, ONGC has 17 buy calls, 12 sells and 11 holds.

ONGC has emerged as a top pick for brokerages in the oil and gas sector over the last one year, as the PSU aims at an earnings expansion led by higher realisations and rising production.

Oil & Natural Gas Corp Ltd (ONGC) has 17 buy calls, 12 sells and 11 holds as of August end, according to Bloomberg data.

In Q1FY24, ONGC delivered robust financial results, exceeding analyst expectations. As per JM Financial, the company's standalone EBITDA surged to a staggering Rs 19,500 crore, driven by higher-than-anticipated realisations, reduced royalty costs, and lower exploration write-offs. Resultantly, ONGC's standalone net profit surged to Rs 10,000 crore, surpassing analyst estimates.

Better realisations

During the quarter ended June 2023, ONGC reported higher crude and gas realisations. Crude sales volume slightly exceeded expectations at 4.72 million tonnes, up 1 percent on-quarter but down 6.09 percent on-year, while crude production fell below estimates at 5.3 million tonnes. Gas sales volume slightly missed JM Financial's forecast at 4.1 billion cubic metres (bcm), down 1.1 percent QoQ and 1.6 percent YoY. However, the overall gas realisation was higher at $7.3 per million British thermal units (mmBtu), surpassing JM Financial's projection of $6.7 per mmBtu and the $9.0 per mmBtu recorded in 4QFY23.

Under new developments, according to brokerage firm Motilal Oswal Financial Services, the ONGC management had anticipated oil production from the KG-DWN98/2 block to start by August 2023 in an optimistic scenario and by October 2023 in a worst-case scenario, with peak production projected at 40,000-45,000 barrels a day.

The implementation of the Kirit Parikh Committee recommendations from April 2023 has provided the much-needed relief to ONGC, enabling it to sell gas above the cost of production. Analysts have incorporated gas price assumptions of $6.7 per mmBtu for FY24-FY25. Additionally, 6-8 percent of APM gas production will come from new wells, attracting a 20 percent premium under the new pricing policy.

Brokerage firm Motilal Oswal has given a 'buy' rating to ONGC with its standalone business valued at 6 times the FY25 adjusted EPS of Rs 30.8, and the value of investments added to arrive at a target price of Rs 220, implying a 24 percent potential upside.

Growth plans

ONGC's ambitious growth plans include adding over 100,000 square kilometres of exploratory area annually and allocating Rs 10,000 crore each year to exploration. The capex guidance for FY24 is set at Rs 30,100 crore. The company recently approved three projects with a capex of Rs 58,800 crore and is exploring the possibility of Rs 7,000-8,000 crore in petrochemical expenditure at MRPL. There is also a consideration for setting up a petrochem facility at a budget of Rs 30,000-40,000 crore.

HDFC Securities has maintained the 'add' tag on ONGC with a target price of Rs 190, citing oil and gas production growth at a 5-7 percent CAGR over FY23-25 and an attractive valuation of 4.1 times September 2024 earnings per share (EPS). It noted that Q1FY24 reported EBITDA exceeded estimates due to lower-than-expected employee costs and statutory levies.

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