Value Pick: Rising crude oil prices brings ONGC in focus; brokerages see 30% upside

Rising energy prices have brought back oil exploration and production companies into focus. The rise in crude oil prices have made stocks lucrative. Most brokerages pick Oil and Natural Gas Corporation (ONGC) as value pick with an upside up to 30 per cent from Tuesday’s close that is Rs 179 per share.  

Except today, the stock in the last 9 sessions have jumped almost 15 per cent, alone on Monday it had registered a growth of 13 per cent at the market close. All oil marketing companies, including ONGC have been gaining in the trade with rise in the crude oil prices. 

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Brent crude price has spiked to over USD 125/bbl as US and European allies are considering banning crude oil imports from Russia in response to its ongoing aggression in Ukraine.  Russia is the world’s largest producer of crude at 10mmbpd; of this, it exports 4.7 mmbpd of crude. 

JM Financial 

The brokerage maintains a Buy on ONGC with a target price of Rs 230 per share, around 29 per cent as it being key beneficiaries of rising crude prices. At current market price, ONGC is discounting USD 60-65/bbl Brent — every USD 1/bbl rise in crude realisation implies a 2-4 per cent jump in EPS of ONGC. 

ONGC will also benefit from the likely jump in domestic gas price in FY23. At current market price, the stock trades at 5.2x FY23E EPS and 0.9x FY23E BV (3-year avg. of 0.6). 

ONGC has 3 oil and gas assets in Russia contributing to 5.4mmt of oil (or 64% of OVL’s crude production and 17 per cent of ONGC’s total crude production) and 2.1 bcm of gas (or 46 per cent of OVL’s gas production and 8 per cent of ONGC’s total gas production).  

ICICI Direct 

ONGC will gain from increase in oil prices amid geopolitical conflict. The brokerage revise rating from Hold to Buy on ONGC amid favourable oil prices and value ONGC at Rs 225 per share, 28 per cent upside. Surge in oil prices will lead to better realisation, benefitting ONGC. 

Nirmal Bang 

We see the surge in refining margins, driven by widening spreads and inventory gains, mitigating the pain in retail MS/HSD margins as pump prices have not been raised since early Nov’21 despite the sharp increase in global crude oil and MS/HSD prices.  

In our view, this is a key consideration that will determine the timing and extent of excise duty cuts, as well as increase in pump prices of MS/HSD. These two decisions taken together may be calibrated to ensure the least burden on consumers and reduce the strain on government finances that the anticipated cut in excise duty cut will entail. 

Other Brokerages

Motlial Oswal gives Buy recommendation for the stock with 19 per cent upside, to target price of Rs 225 per share on the BSE. While Axis Securities see an upside of 15 per cent with target price of Rs 195 per share for ONGC shares.