Oil India, ONGC gain up to 4% on improved earnings outlook

Shares of upstream oil companies, Oil & Natural Gas Corporation (ONGC) and Oil India gained up to 4 per cent on the BSE in Wednesday’s intra-day trade on improved earnings outlook. Sustained higher crude oil prices and gas realisations can result in better profitability for upstream companies, say analysts.

In past one month, ONGC and Oil India have outperformed the market, by surging  7 per cent and 10 per cent, respectively. In comparison, the S&P BSE Sensex was down 0.56 per cent in during the same period.

At 02:20 PM; Oil India was up 4 per cent at Rs 257.05, while ONGC up 2 per cent at Rs 154.80 on the BSE. In comparison, the S&P BSE Sensex was up 0.80 per cent at 59,429. Oil India (dividend of Rs 10 per share) and ONGC (dividend of Rs 4 per share) turned ex-date for their respective interim dividend on February 22 and February 24, respectively.

Last month, on February 15, the government cut the windfall profit tax on domestically produced crude oil from Rs 5,050 per tonne to Rs 4,350 per tonne. Windfall tax is levied by Centre on profits made by oil producers on any price they get above the rate of $75 per barrel.

Over the past three years, the dividend payout of ONGC has stood at around 33 per cent of its consolidated PAT. In addition to the great conjunction of production growth and better gas segment profitability, this implies a strong dividend yield of 13.6 per cent for FY23, analysts at Motilal Oswal Financial Services said.

For 10 quarters, domestic administered price mechanism (APM) gas price was below $3/mmBtu (NCV), roughly the cost of gas production for ONGC. For another eight quarters, ONGC barely made any money on its gas production with domestic gas prices being below USD3.5/mmBtu (NCV).

The floor of $4.0/mmBtu recommended by Kirit Parikh, thus, provides a fillip to its profitability from the nominated fields as well as incentivizes ONGC to raise production that would garner a 20 per cent premium over the prevailing APM gas price, the brokerage firm said.

With increased visibility of positive outcome, analysts reiterate their BUY rating on the stock with a target price of Rs 198 per share.

“We recommend ONGC as the top idea for 2023 in the sector,” the brokerage firm said in December 2022 report.

Net oil realisation would remain capped at around $75-76/bbl in the near to medium term on account of special additional excise duty (SAED) levied by the government. Even if gas prices get capped at $6.5/mmBtu after Kirit Parikh committee recommendations, realisations are likely to remain high as they are well above historical averages. With commencement of production from the KG Basin in May, volumes are expected to grow, going ahead for ONGC, analysts at ICICI Securities said.