This confidence on the part of analysts stems from the fact that despite odds the company was not pushed by the government to share the latter’s subsidy burden. Analysts at Elara Capital say the government’s budgeted FY19 oil subsidy rose by Rs 12,900 crore to Rs 37,500 crore, but it has not included upstream PSU (ONGC and Oil India) under the subsidy-sharing mechanism. This gives them confidence that ONGC would not be a part of oil subsidy-sharing if oil stays below $75 a barrel and that would help in re-rating of the stock.
Crisil Research, too, adds that the upstream companies may not be asked to share subsidy burden as they have already contributed through divestment of some government stake and have limited wherewithal.
The Street’s confidence further stems from oil and gas pricing reforms continuing with a stable government in place now. In fact, some analysts even see kerosene and LPG subsidies being further reduced. Analyst at Motilal Oswal Securities remain positive on ONGC and say, “We may see structural changes in LPG and kerosene with continued focus on reforms by the new government.” This is in addition to their confidence in oil prices, which they expect to remain stable at $60-70 a barrel over the next two years. These levels also do not pose any threat of subsidy sharing, they add.
ONGC also remains well placed as it has been able to maintain oil production and is also seeing rising gas output. Revenues from the gas segment surged 43.5 per cent year-on-year during the March quarter, on the back of an 8.9 per cent rise in volumes, 20 per cent increase in administered prices of natural gas (APM price) and rupee depreciation. ONGC’s FY19 gas production at 25.8 billion cubic meters (BCM) also was ahead of its target. With incremental production from the S-1, Vashishta and Daman fields ramping up to 4–5 mmscmd (million standard cubic meters per day), ONGC’s management has guided for a 5–6 per cent uptick in FY20 production. Going ahead too, analysts at Edelweiss say they see a 20 per cent surge in gas production during FY21 as the KG-98/2 basin comes on stream, which will add 15–20 mmscmd at peak. The company has set a production target of about 43 BCM by FY22 aided by investments of over Rs 50,000 crore.
It isn't surprising that foreign brokerage, CLSA, taking a longer-term view, expects the stock to be a two-bagger in three years. They say that consistent subsidy exemption under the NDA government raises their confidence, while the ONGC stock is currently pricing a sub-$55 a barrel levels of net realisation. While the foreign brokerage has lowered its target price-to-earnings (P/E) multiples to 10x acknowledging the overhang of share-supply from stake sales by the government, an earnings upgrade has led to increase in their target price from Rs 240 to Rs 285, indicating potential upside of 73 per cent. Experts believe, the stock’s underperformance in the last one month due to volatile oil prices, offers a good entry point.
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