ICICI Securities Suggests Buy This Oil & Gas Sector PSU Stock, Sees Aggressive 35% Upside Shares Price

Leading brokerage firm ICICI Securities in its December 27, 2022, report on Oil & Natural Gas Corporation Limited (ONGC) has assigned a buy call on the stock with a target price of Rs 195 apiece. The brokerage claims a potential upside of around 32% from its current level considering the given target price of the stock. It is a Large Cap PSU Maharatna Company that operates in the Oil & Gas and Petrochemicals sector. It comes under the ownership of the Ministry of Petroleum & Natural gas, Government of India. It has a market cap of Rs 1,82,351 crore.

ICICI Securities recently met ONGC management (on Dec 16, 2022) to get a sense of their business and future prospects. Presented below are the key takeawa

Stock Outlook & Returns

The last traded share price of ONGC stock on the NSE is Rs 144.80 apiece, 2.48% up from its previous close. The stock's 52 week low level is Rs 119.85 apiece and the 52 week high is Rs 194.95 apiece, respectively.

The stock in the last 1 month surged 3.02%, whereas, in the past 3 months, it has surged 16.35%, respectively. It has given 5.42% positive returns in the last 1 year. It gave 12.77% positive returns in the last 3 years. In the last 5 years, the stock fell 24.82%.

Brent remains strong despite recent reverses

Brent crude prices have moderated to US$81/bbl levels (last 1-month average) driven by continued global economic concerns and the resurgence of covid in China as they have loosened lockdown restrictions. However, despite windfall tax impact, net realisation for ONGC may stay at US$75/bbl levels, which is US$18/bbl higher than the average realisation over FY15-22. At our FY23E and FY24E estimates of Brent crude @US$90/bbl levels, we see ONGC's net realisation remaining at ~US$75/bbl - well above its historical averages.

Production growth to improve

ONGC's MoU targets (standalone, excluding JV share) of 21mt (+8% YoY) of oil and 24.3bcm of gas (+18% YoY) are ambitious and predicated on the commencement of KG 98/2 asset after 2 years+ of delays. With an estimated ~12mmscmd of gas and ~40kb/d of oil production expected by FY25E, KG asset will entirely account for ~2mtoe of oil and most of ~5bcm/y gas output boost expected by FY25E. Delays in the arrival of Floating Production and Storage Offloading (FPSO) unit , which was a major constraint in the project startup, has entered Indian waters as of last month and with the installation of the same by January, there is greater certainty and visibility on the timelines of KG asset. ONGC is also guiding to flat oil and marginal uptick in gas output of OVL for FY24E

We remain conservative on production growth estimates

ONGC's standalone production of oil & gas (including JV share) declined by ~6.7mtoe in the last 4 years. Also, while the start of production from the KG basin asset and new assets is expected to redress this trend over FY23-FY27, we remain conservative in our estimates, factoring-in 3% CAGR in oil and 9% CAGR in gas output (standalone) over FY22-FY24E.

Gas price recommendations are largely positive

The Kirit Parikh Committee recommendations of a price floor of US$4/mmbtu and a cap of US$6.5/mmbtu for APM gas, retaining premium for difficult fields and proposing a gradual movement to free pricing in 3 years (annual escalation of US$0.5/mmbtu till then) is a material positive. ONGC has a production and development cost of only US$3.5/mmbtu for most of its legacy fields and has seen an average blended realisation of only US$3.7/mmbtu over FY15-22.

Strong earnings growth ahead; BUY

ICICI Securities has said, "We estimate an EPS CAGR of 19% over FY22-24E, driven by assumptions of US$75/bbl crude realisation, US$7.8/mmbtu gas realisation and a CAGR of 3.9% in overall group production (including OVL). Valuations of just 2.7x FY24E EPS, 2.2x EV/EBITDA and 0.5x P/BV remain attractive. Reiterate BUY."

Brokerage list 3 Key risks, these are as follows: i) Sharp reversal in oil & gas price trends, ii) further delays in start of production from KG basin, and iii) regulatory setbacks.

Disclaimer

The stock has been picked from the brokerage report of ICICI Securities. Greynium Information Technologies, the Author, and the respective Brokerage house are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to consult with certified experts before making any investment decision.