Nuvama assigns 'reduce' rating to this Nifty heavyweight after PSU misses guidance for 6 years

Index heavyweight ONGC has been losing its attractiveness in the upstream oil and gas space. Recently after its Q2 show, the brokerage firm Nuvama has assigned it a 'Reduce' call on the premise that the company has been missing on its production guidance for the past six years.

Also its past production has consistently fallen at 3.2% CAGR, 1P reserves by 3.3% CAGR.

Since its Q2 earnings on November 12 and infact for the past six days - ever since the equities have been under correction, the stock has fallen as much as 7 per cent.

As at the last count in today's session (November 14), the stock ended at Rs 251.5 per share on the NSE, while on the BSE it closed at Rs 250.9 apiece on the BSE.ONGC’s attractiveness as an upstream oil & gas play has just been diluted further. It has sharply raised investment in downstream petrochemical subsidiary, OPAL, in addition to its overwhelmingly large existing investments in refinery/OMC MRPL & HPCL, added the brokerage in its report dated November 13.

Higher realisation and lower levies beat estimate; production falls

The brokerage report highlighted that the company's Standalone EBITDAX fell 1 per cent YoY/2 per cent QoQ to Rs 18,200 crorebn but beat estimates on 5 per cent revenue beat and lower statutory levies (-10%), part offset by higher employee (+4 per cent) and other costs (+3 per cent).

Oil/gas production fell 2 per cent/3 per cent YoY. With crude oil prices less than USD75/bbl, ONGC’s earnings are poised for a free fall. Moreover, APM or Administered Pricing Mechanism gas price is pegged at a 10 per cent slope to crude, with a ceiling of USD6.5/mmbtu, which is scheduledto be raised to USD6.75 from FY26. With oil prices falling to ~USD72/bbl, the oil threshold of USD67.5/bbl is within sight and could force a cut in APM prices as well.

APM rate is the rate at which natural gas is sold by participating companies to customers and is decided by the government.

Another painpoint is the investment in OPAC which is seen to result in a higher cost for the company

The new well gas (NWG) allocation up to 3.2mmscmd shall assure cheaper feedstock supply thereby improving OPAL’s operational viability. NWG forms around 8.5 per cent of ONGC’s gas production. Premium pricing (12% slope to oil) for NWG gas may add Rs 12,000 crore (2%) to PBT, in theory but in practice ONGC shall incur higher cost, thus diluting gains, added the report.

Cautious view on drag in production 

Hence considering the miss on production guidance year-after-year, the brokerage has assigned a reduce call and id cautious on the company's  46.2MMTOE O+OEG production guidance by FY27E. Also the brokerage has slashed FY25E/26E consolidated EPS by 4 per cent/1 cent to factor in HPCL’s earnings cut, value of investments.