ONGC Has Almost 50% Upside, Says Jefferies On Initiating 'Buy'

Jefferies says gas-pricing reforms will be earnings-accretive for ONGC.

<div class="paragraphs"><p>(Source: ONGC website)</p></div>
(Source: ONGC website)

Jefferies India Pvt. has initiated coverage on Oil and Natural Gas Corp. with a 'buy' rating, driven by favourable crude and gas reforms as well as improved profitability. The brokerage has set a target price of Rs 390 apiece, implying a potential upside of 47% from the previous close.

Jefferies also expects strong free cash-flow generation and net-debt reduction for the company.

Constructive Pricing Prospects For Crude

ONGC should benefit from the current tight oil market amid Brent crude prices rising almost 18% on a year-to-date basis. The International Energy Agency has also raised its estimate for oil demand for 2024 while lowering its supply estimate, according to Jefferies.

KG basin's production will not be subject to the special additional excise duty, which is a tax levied by the government on the production of domestically produced crude oil. This will stand to benefit the company, Jefferies said.

Gas-Pricing Reforms

Jefferies said gas-pricing reforms would be earnings-accretive for the company. This includes:

  • Floor pricing.

  • An annual price hike of $0.25 per million British thermal unit from fiscal 2026, applicable over and above the 10% ceiling of the Indian crude basket.

  • A 20% premium gas pricing for new wells in nomination fields that could be applicable for 10% of production in fiscal 2026.

  • Higher price for new KG basin production.

Production, Profitability

Jefferies expects the upstream company's domestic production to return to growth over fiscal 2024–26. The brokerage expects a 3% and 6% compounded annual growth rate for production of crude oil and gas over fiscal 2024–26, driven by the ramp-up of KG basin production.

Jefferies said ONGC's net realisation per barrel of oil has risen to $43 over fiscal 2022–23 from $30 during the pre-Covid period. The brokerage expects this trend to sustain over fiscal 2024–26.

The brokerage also expects the company's net cash position to rise and the free cash flow to be around Rs 71,000 crore over fiscal 2024–26. Jefferies also expects ONGC's net debt to equity position to fall from 0.32 times to 0.16 times.

Shares of ONGC were trading 3.01% higher at Rs 273.70 apiece on the NSE, compared to a 0.76% decline in the benchmark Nifty 50 as of 10 a.m.

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