Shares of upstream oil companies Oil and Natural Gas Corporation (ONGC) and Oil India (OIL) moved up to 4 per cent higher on the BSE in Monday’s intra-day trade after the central government reduced the windfall tax on petroleum crude to Rs 2,100 per metric tonne, down from Rs 4,600 per tonne, effective from August 17.
India began imposing a windfall tax on crude oil producers in July 2022 and extended it to include the export of gasoline, diesel, and aviation fuel. This move was prompted by private refiners preferring to sell fuel internationally to capitalise on refining margins rather than selling it domestically.
Earlier, on July 31, the windfall tax on crude was cut by 34.2 per cent to Rs 4,600 per tonne. Additionally, there will be no windfall tax on the export of diesel and aviation turbine fuel (ATF).
Brent crude price had corrected to ~$75/bbl in the 1st week of August 2024 due to demand growth concerns on the back of macro-economic concerns in the US and China and risk-off sentiment across financial markets. However, in the last few days, Brent has recovered to ~$80/bbl driven by continued geopolitical tension in the Middle East and some easing of macro-economic concerns.
Though the International Energy Agency (IEA) expects surplus to emerge in CY25, analysts at JM Financial Institutional Securities believe OPEC+ (Organization of the Petroleum Exporting Countries) is likely to pause/reverse easing of voluntary output cuts to ensure market remains in deficit. Hence, the brokerage firm said they still believe the strong pricing power of OPEC+ will continue to support Brent at ~$80/bbl, which is the fiscal break-even crude price for Saudi Arabia. This is a sweet spot for OIL/ONGC.
The brokerage firm maintains BUY on OIL/ONGC given robust ~30 per cent/15 per cent production growth outlook in the next 1-3 years; Oil India also benefits from lucrative Numaligarh Refinery (NRL) capacity expansion.
“We have cut our estimates of ONGC by 5.3/3.3/4.5 per cent over FY25/26/27E to factor in weaker Q1FY25 performance for subsidiaries HPCL and MRPL and slight delay in KG 98/2 basin production. Stronger cashflow and production outlook, meatier subsidiary earnings over the next two–three years and higher investment value of listed investments drive the uptick in our target price (TP) to Rs 375 (from Rs 340), maintain ‘buy’ rating,” said analysts at ICICI Securities in Q1FY25 results review.
OIL is one of top picks within Elara oil & gas universe. The brokerage firm raised its Target Price to Rs 780 on higher FY26E EV/EBITDA assumption at 10.0x (from 7.0x), led by expectations of strong production growth in the next five years.
OIL reiterated its production guidance of 4mn tonnes/5bcm oil/gas in the next two years as once the gas grid completes by year-end, there will be no constraint on gas offtake. OIL is planning to drill 81 wells in FY26 and 100 in FY27. Wells drilled in the previous years are as follows: 36 in FY20, 36 in FY21, 38 in FY22, 45 in FY23 and 61 in FY24.
“On a conservative basis, we build in 8 per cent and 16 per cent volume CAGR over FY24-26 to 3.9mmt of oil and 4.3bcm of gas, respectively, by FY26. Net oil realization at ~US$75/bbl continues to remain at comfortable levels and gas realization would rise by US$0.25/mmBtu to US$6.75/mmBtu from 1st Apr’25,” analysts at Prabhudas Lilladher said in Q1FY25 result update. The brokerage firm maintains ‘BUY’ rating on OIL; valuing the standalone business at 12x FY26 adjusted EPS and adding the value of investment in NRL to arrive at a Target Price of Rs 766.
First Published: Aug 19 2024 | 12:51 PM IST
