The stock of Oil India Ltd scaled an all-time high, while ONGC Ltd climbed a six-year peak, extending gains for a second straight session, and Reliance Industries gained 1 percent.
All these took place on December 20 as crude prices firmed up to $79.35 a barrel and the government decided to lower the levy on windfall gains on locally produced crude oil and diesel exports.
Oil India surged 20 percent to reach a new peak of Rs 406 intraday, ONGC zoomed 5 percent to Rs 212 per share that marks its highest level since 2018. The cut in windfall profit tax aided the positive market sentiment. The tax, previously in the form of Special Additional Excise Duty (SAED), has been slashed from Rs 5,000 to Rs 1,300 per tonne for domestically produced crude oil, as per a notification.
Analysts foresee sustained high oil prices at $80-100 a barrel throughout much of 2024, driven by robust demand growth despite ample supply, although subject to potential delays.
Higher output pushes Oil India gains
According to Antique Stock Broking, Oil India is on track to drive 21 percent increase in production and 51 percent jump in gas outptut in the medium-term and step up its refining capacity three-fold.
The broader oil and gas price scenario remains stable with realizations being capped at $75 a barrel and $6.5 per mmBtu. The company is offering a free cash flow yield of 7 percent in FY26 at a normalised oil price assumption of $65. The brokerage house has maintained a 'buy' rating on the stock and increased its target price to Rs 419 from Rs 341 a share.
Strong realisations, valuations drive gains
Motilal Oswal expects to see strong oil sales realisations for ONGC and Oil India in FY24. The brokerage also predicts a multi-year upcycle for the upstream sector after eight years of underinvestment. The upstream sector remains their top choice in the oil and gas industry.
"We recommend ONGC and OINL from this domain. On P/OCF basis, ONGC and OINL are currently trading at their lowest level in the past eight years," Motilal Oswal said in its recent note.
ONGC and Oil India present attractive valuations compared to other upstream peers in the Asia-Pacific Universe. Regional counterparts like Thailand based PTT Exploration and Production Public and China National Offshore Oil Corporation trade at one-year forward P/B valuations of 1.2x, with Bloomberg consensus ROE forecasts at 13 percent and 18 percent, respectively.
Analysts anticipate strong operating cash flows for ONGC and Oil India in FY24-25 due to increased oil and gas realisations. Despite ambitious capital expenditure (capex) plans, both companies are projected to generate positive free cash flow during FY24-25, according to consensus estimates.
ONGC and Oil India remain top picks of Motilal Oswal in the sector due to their increased ROE by 140bp and 630bp from FY14-23. Despite this growth, their valuations are still near or below historical levels, Motilal report said.
"Additionally, there's potential value through ONGC's subsidiary, OVL, which makes up 9-10 percent of its Total Portfolio (TP). Finally, based on the FY25E P/OCF metric, ONGC/OINL currently trade at 2.7/4.1x, marking the lowest level since FY14, except for FY20," the brokerage house said.
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