Morgan Stanley upbeat on energy stocks; ONGC, Oil India top the hotlist

India first imposed windfall profit taxes on July 1, joining a growing number of nations that tax super normal profits of energy companies. (Representative Image)

Morgan Stanley on February 21 released a bullish report on the Indian energy sector, saying its “slow and steady metamorphosis” would propel future prospects.

Increased output by Indian oil producers at a time when the world’s production is declining was the main theme of the report.

Morgan Stanley named Oil and Natural Gas Corporation (ONGC) and Oil India as key picks in the energy sector.

“ONGC and Oil India are seeing a structural shift in their return quality as they kick-start production growth after more than a decade, commodity prices remain higher and government policies keep hydrocarbon pricing in India closer to market prices as subsidies unwind,” said the report.

Investors in the energy sector lost track of this shift in return quality since windfall taxes were introduced in July 2022. However, Morgan Stanley analysts noted that structural reforms undertaken over the past six months, especially for upstream producers (producers involved in exploration and production of crude oil and natural gas) like ONGC and Oil India are likely to gradually ease decades of challenges.

Analysts at the investment firm also believe that the earnings quality and returns of ONGC and Oil India have reached an inflection point and are expected to see a positive movement. They noted that both the well-capitalized companies have returned more cash to their shareholders than their current market caps since 2008. This is an attractive point as Morgan Stanley expects the Average Selling Prices (ASPs) to double this decade.

ONGC’s total dividend payments since 2008 amount to $25 billion in dividends since 2008, weathering declining production and several government interventions. As ASPs of its domestic hydrocarbon double over the next 10 years, Morgan Stanley expects dividends to also follow suit, even with limited volume growth.

Morgan Stanley raised the target price for ONGC to Rs 199 from Rs 177 to “reflect higher crude price realisations, lower international capex and higher gas prices.”

Coming to Oil India, Morgan Stanley notes that although the company accounts for a tenth of India's total hydrocarbon production, it is one of the best volume growth plays in the industry.

“Volume growth is higher than management guidance and dividend yield remains attractive,” said the brokerage report. Higher productions, refining margins and gas ASPs are expected to push up earnings by 1-10 percent, it said.

The target price of Oil India was also raised to Rs 323 from Rs 253.

“We forecast ONGC and Oil India to have 2-5 percent production growth as well as significant upside in their downstream fuel businesses in 2023. Their dividend yields at 8-12 percent are also in the top quartile vs. global peers,” Morgan Stanley analysts observed.​

At the end of the trading hours on February 22, Oil India closed 2.39 percent lower at Rs 248.70, whereas ONGC shed 0.32 percent to close at Rs 153.60, on the NSE.