ONGC shines among upstream PSUs; ₹35,000 crore-capex plan triggers upgrade: What’s behind the bullish momentum?

Shares of Oil and Natural Gas Corp (ONGC) have picked up a bullish momentum ever since the state-owned upstream oil explorer registered a surge of 78 per cent in net profit during the January-March quarter of fiscal 2023-24 (FY24). ONGC shares have given over 11 per cent returns to investors in the last one week due to bullish brokerage upgrades, soaring production levels, and a robust growth outlook.

Domestic brokerage Geojit Financial Services is bullish on ONGC and has upgraded the stock to ‘buy’. The brokerage eyes 19 per cent returns on the upstream PSU stock in the next 12 months at a revised target price (TP) of ₹327, against a current market price (CMP) of ₹276.55.

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‘’The company is expected to improve its earnings performance backed by increased production at KG 98/2 field, improved realisations, monetisation of discoveries, increased capex and potential adjustment of windfall tax. Hence, we upgrade our rating on the stock to BUY with a revised TP of Rs. 327 based on the sum of-the-parts valuation,'' said Geojit Financial Services on ONGC.

ONGC shines among upstream PSUs: What's behind the bullish momentum?

-Capex target: The public sector undertaking (PSU) expects its capital expenditure (capex) to be in the range of ₹33,000- ₹35,000 crore for the current fiscal (FY25). ONGC's capex for FY24 came at ₹37,000 crore. ONGC y made 11 field discoveries in FY24 and the reserve replacement was 1.15x.

Monetising new discoveries, securing premium gas prices for production from nomination field, and potential improvement in net realisations for crude oil are expected to enhance ONGC's earnings, according to the brokerage.

-Production levels: ONGC also plans to increase production at its KG 98/2 field to 45,000 barrels by Q4FY25 from the current 12,000 barrels. It also expects to achieve a gas production rate of 10 million cubic meters per day by Q4FY25.

‘’ONGC expects to raise its production from the current 39.45 mmtoe to ~47 mmtoe by FY27. It aims to take oil production to 22 mmt and gas production to about 25.5 bcm by FY27,'' said Geojit.

The ramp-up of the KG 98/2 is expected to boost the company’s oil and gas production in the coming years. Additionally, higher prices for its produce will support its performance as the windfall tax does not apply to KG 98/2.

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ONGC Q4 Results

ONGC posted an increase of around 78 per cent in consolidated net profit at ₹11,526.53 crore in the fourth quarter of FY24, compared to ₹6,478.23 crore in the corresponding period last year. Sequentially, ONGC's net profit increased marginally in the quarter ended March 31, from ₹11,104.50 crore posted in the previous quarter.

The state-owned oil and gas exploration major reported a marginal increase in revenue from operations for the fourth quarter of the current fiscal year, amounting to ₹1.66 lakh crore, compared to ₹1.64 lakh crore recorded in the same period of the previous year.

The company’s board of directors recommended a final dividend of ₹2.50 per equity share of face value of ₹5 each for the financial year 2023-24, subject to the approval of shareholders.

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ONGC’s earnings before interest, tax, depreciation and amortisation (EBITDA) for Q4 rose to ₹25,772 crore in Q4FY24 from ₹15,752 crore during the corresponding period last year. Crude oil price realization from ONGC’s nominated fields was $80.81 per barrel for the March quarter compared to $77.12 per barrel for the same period last year.

During FY24, ONGC declared 11 discoveries (six in onland, five in offshore) in its operated acreages. Out of these, six are prospects (one in onland, five in offshore) and five are new pool (onland) discoveries. ONGC drilled 541 wells, the highest recorded in the past 34 years, comprising 103 exploratory and 438 development wells.

ONGC, which accounts for about two-thirds of India’s oil and more than 50 per cent of its gas output, announced the commencement of “first oil" from the deep water KG-DWN-98/2 Block, situated off the coast of Bay of Bengal on January 7, 2024.
 

Disclaimer: The views and recommendations provided in this analysis are those of individual analysts or broking companies, not Mint. We strongly advise investors to consult with certified experts before making any investment decisions, as market conditions can change rapidly and individual circumstances may vary.