ONGC Stocks: Is a Breakout Imminent?

ONGC Stocks: Declining crude oil prices may have negatively impacted ONGC share prices, but the stock is still in focus for the day. There are many reasons for this, including the positive impact of windfall taxes on crude oil and the correction of more than 15% in ONGC stocks in the last month.

ONGC produces crude oil, natural gas, and other value-added products, including Liquified Petroleum Gas (LPG), Superior Kerosene Oil (SKO), and naphtha. Maharatna ONGC is one of India’s largest crude oil and natural gas companies, accounting for nearly 68.2 percent of production. The company also serves clients abroad and has tie-ups with oil and gas ventures in countries like Egypt, Norway, Tunisia, Vietnam, Australia, and Iran.

The stock hit Rs. 323.6, a 5.4 percent intraday rally on the BSE. ONGC still has strong growth prospects, with Jefferies suggesting over 40 percent upside and a target price of Rs. 420.

Here’s why Jefferies thinks the stock has this kind of upward trend.

1. Production has been on track and is growing. With guidance being reiterated, Jefferies believes that management is confident it can ramp up production further to achieve 5-6% CAGR levels over the next two years, between FY25 and FY27, owing to the KG basin.
2. The higher operating costs can be offset by the higher profitability owing to the KG basin, and the management expects to attract higher profits via higher realizations. The KG field productions won’t be subject to Special Additional Excise Duty (SAED), as these higher gas realizations are benchmarked to HPHT gas, which is currently 50% more premium than APM gas.
3. Moreover, KG field productions won’t also be subject to Special Additional Excise Duty (SAED) due to lower statutory levies in the initial years of production.
4. KG production will continue as per Jefferies and contribute 10% to the estimated consolidated earnings of FY26 before interest, taxes, depreciation, and amortization.
5. Current crude oil prices may affect ONGC’s standalone realizations and earnings. However, according to Jefferies, management thinks that HPCL’s improved marketing profitability should partially offset and cushion the overall impact on consolidated earnings.
6. ONGC has already committed to going green, and the management has set a net zero target to achieve by 2038.
7. Jefferies analysts also suggest that valuation will remain favorable as ONGC trades at a 65% discount, steeper than the Nifty and its long-term average of 50%.

Conclusion

ONGC is looking toward a bright future, and is expecting to compensate for production declines in the third quarter of FY24 when it also saw a 2.2% decline in annual revenues and a 7.9 percent decline in net profit. It hopes to achieve this with upcoming projects bringing in additional production. The company is also looking at similar production growth in FY24, as with FY23, and expects these numbers to be significantly higher come FY27, owing to better projects and contributions. ONGC also wants to invest in more projects in the next three years, and the oil and natural gas producer and supplier hopes to increase its standalone capex for the current FY and the forthcoming FY to support growth.

ONGC Stocks