Upstream PSU firms shine amid oil surge; Oil India, ONGC stocks may see 53-58% upside

The surge in fuel prices since Russia’s invasion of Ukraine in late February may have emerged as a major upside risk to India’s inflation and trade deficit, but upstream state-owned oil companies are attractively placed at the current juncture, analysts said.

“Stock prices of upstream PSU firms like

and Oil India have gone up 13-46 per cent in the past six months despite 67 per cent rise in Brent crude price and 110 per cent hike in domestic administered price mechanism (APM) gas based on windfall tax gain concerns,” global financial advisory firm Elara Capital said.

While the Organization of the Petroleum Exporting Countries plans to increase supply by 0.65 million barrels per day over July and August, sanctions on Russia have shaved off 1 million barrels per day from Russia, thereby boosting prices, the firm said.



Elara Capital expects domestic gas prices to be revised upwards by $9 per MMBTU (Metric Million British Thermal Unit) by the end of October 2022; a key factor contributing to the positive view on upstream PSUs.

“OPEC supply over February-April has increased by a mere 0.1mmbpd vs a required rise of 0.8mmbpd, indicating its inability to spur supply growth. Even if the war were to end, sanctions against Russia would not be lifted in the short term, thereby bolstering bullish oil prices,” the firm said.

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The firm considers to be attractive with a margin of safety. ONGC’s valuation prices in a barrel of crude oil at $65, providing a considerable margin of safety even if oil prices were to correct 30 per cent from their prevailing levels, Elara said.

According to the firm, from now till the end of the financial year, ONGC’s earnings per share sensitivity to a $10 per barrel change in crude oil prices is Rs 6.7.

On Oil India, Elara expressed much optimism, saying that all engines of the state-owned giant were firing with upstream Numaligarh Refinery.

“OINL is benefitting on high crude oil prices and Numaligarh Refinery (NRL) GRM as its product slate is 70 per cent diesel for which cracks have reached >$ 40/bbl,” Elara said.

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Oil India’s valuation prices in crude oil at $60 per barrel and the FY23 end earnings per share sensitivity to a $10 per barrel fluctuation in oil prices is Rs 7.3, the firm said.

Oil India has smashed most targets set by brokerages in recent days due to improving margins led by rising crude oil prices with the stock delivering more than 100 per cent returns in the last one year.

The stock on Thursday hit 52-week-highs as it jumped over 8 per cent.

Haitong Securities in its monthly report on the Hydrocarbon sector said that gross refining margins (GRM) of refinery companies were breaking all barriers.

Elara Capital has increased ONGC and Oil India’s EPS for FY23 end by 69 to 83 per cent and 50-61 per cent by the end of the next financial year based on higher prices of crude and gas and gross refining margins.

“We assume Brent crude at $95/bbl for FY23E and $90/bbl for FY24E (from $75/bbl) and APM at $7.5 per MMBtu for FY23E and $7.2 per MMBtu for FY24E (from $5.2/MMBtu),” Elara said.

The advisory firm has reiterated its buy call for ONGC and Oil India and increased target price for the former to Rs 255 and that for Oi India to Rs 469 based on higher EPS and a weaker longer-term domestic exchange rate at 76.5/$1 from 74.5/$1.

The targets imply a 53-58 per cent upside for the stocks from current levels, Elara Capital said.

“We value ONGC using a DCF method, assuming 10% (unchanged) WACC. Our implied value of ONGC & OINL 1P reserves is $5.3/boe from $4.9/boe. We value OINL 69.6% stake in NRL at INR 99/share, assuming 5.0x FY23E EBITDA.” END

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)

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