Attractive valuation, improving prospects turn analysts positive on ONGC
After a long time, the street is abuzz with news of improving output at Oil and Natural Gas Corporation Limited (ONGC). For a company which has not seen its oil and gas production grow much over past few years, sustained rise in gas production is positive. The initial boost to output is expected from ONGC’s Daman offshore field, while KG basin and CBM fields in Jharkhand will start pushing growth in the coming years.
Analysts at Motilal Oswal Securities say that after almost a decade of negative-to-flat growth, they believe gas production would grow at 10-15 per cent annually for the next five years. Their confidence comes from expectations of Daman fields adding 4.5 mmscmd (million standard cubic meters per day) to gas production in FY18 as SI & Vashishta fields add 1.5 mmscmd and WO16 field another 1.2 mmscmd.
More gains can accrue if gas prices are hiked, as is being anticipated in October review. Analysts are already starting to build in such a possibility. Those at Kotak Institutional Equities said that ONGC will benefit from the expected recovery in domestic gas price to $3.3/mmmbtu in H2FY18 from $2.8/mmbtu currently.
Little surprise that analysts are turning positive on the company, which augurs well for ONGC’s stock price which has been under pressure since the start of December 2016. Concerns around rupee appreciation, volatile oil prices, and news about oil companies being merged and administered gas prices not getting revised in April are key factors for the weakness in ONGC stock.
Nevertheless, after about 15 per cent correction since the start of December, valuation has become attractive feel analysts who see limited downside from here. The continued reforms by the government such as the gradual increase in kerosene and LPG prices month after a month also bodes well and will reduce subsidy burden of ONGC, and add to its profits.
While this all bodes well, any weakness in oil prices (as seen recently) could hurt ONGC’s financials. Analysts, however, don’t see much downside and believe the price will remain $50 a barrel levels. Analysts at Motilal Oswal Securities recently had said that with stability in earnings to be provided by oil prices remaining in the band of $50-60 a barrel, after two years of negative EPS growth they estimated ONGC’s earnings to grow by 31 per cent and 14 per cent in FY18 and FY19, respectively. Positive policy developments, cost efficiency and a dividend yield of 4-6 per cent would further aid re-rating of the stock, add the analysts.
Kotak Institutional Equities, too, had upgraded their rating as they felt ONGC is a pure play on crude given exemption from subsidies and recovery in domestic gas prices. On May 4, Bank of America Merrill Lynch also upgraded ONGC on inexpensive valuation as it expects gas prices being hikes, oil production increasing from overseas assets, and acquisitions adding to cash flows. The risks of differentiated royalties have also vanished.
