Oil & Natural Gas Corp. became the top performer on the Sensex this week as JPMorgan retained its bullish stance on the oil explorer, citing its attractive risk-reward ratio.
JPMorgan sees a large consensus earnings upgrade cycle ahead for ONGC as three key parts of its business — India operations, overseas assets in ONGC Videsh Ltd., and India gas — are all levered to oil prices.
And hence “with Brent price outlook strong, risk-reward for ONGC remains attractive and the stock is positioned similarly to metal stocks last year where there was a high degree of pessimism in the underlying outlook for metal prices and stocks were under-owned,” the research firm said in a report co-authored by Pinakin Parekh and Shreya Khandelwal.
JPMorgan expects Brent crude prices to touch $80 per barrel by 2021-end due to a weakening U.S. dollar and improving oil demand.
Shares of ONGC rose as much as 3.43% before paring gains. That's the sixth straight session of gains for the stock. It has risen 11.6% for the week ending June 4 against the S&P BSE Sensex's 1.30% gain. So far this year, ONGC's scrip has rallied 37.3% compared with a 9.7% gain in the Sensex. The relative strength index on the stock was above 73, indicating it may be overbought.
Of the 31 analysts tracking ONGC, 23 have a ‘buy' rating, while four each suggest a ‘sell' and a ‘hold', according to Bloomberg data. The average of 12-month consensus price targets implies an upside of 4.7%.
Here's what JPMorgan made of ONGC:
- Remains ‘overweight' with a December 2021 target price of Rs 190 apiece, implying a 61% upside from current levels.
- While ONGC's stock price is at the highest level since February 2020, the discount to Brent crude prices has widened materially given the rally in crude prices.
- With India's retail fuel prices reflecting nearly $70/bbl Brent, subsidy worries are misplaced.
- Retail diesel prices have been increased by Rs 4.65 a litre (5.8%) since end April. Gross marketing margins for India's oil marketing companies have now normalised, and there is no under-recovery and hence no worries about potential subsidy burden.
- In 2018-19, when Brent was in the $60-70 per barrel range, ONGC was in the Rs 140-180 range; as earnings revisions pick up, the research house sees the stock moving higher.
Key risks to JMorgan's rating and price target for ONGC include crude prices sustaining below $45 a barrel and/or ONGC buying government stakes in other state-owned enterprises.
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