Shares of the state-owned oil producer have rallied nearly 21 per cent so far in February and 64 per cent since the beginning of November on the back surging global crude oil prices. Fortunes of the company, which produces two-thirds of all crude oil in the country, moves in line with global crude oil prices, as they affect its average realisation from every barrel of the oil sold.
Global crude oil benchmark Brent has risen for four successive months and registered gains of over 70 per cent amid supply cuts by the Opec cartel and optimism for demand growth as global economies recover from Covid-19 shock.
Analysts at Goldman Sachs and Morgan Stanley are projecting Brent crude price to hit as high $75 a barrel by the end of the September quarter, implying a surge of another 15 per cent from the current level of $65 a barrel.
That is good omen for ONGC, as every $1 a barrel increase in global crude oil prices boosts valuations of the state-owned oil producers by 3-4 per cent.
Brokerage firm JM Financial in a recent note said that if ONGC’s average crude oil realisations shoots up to $68 a barrel from $53 a barrel, keeping its production estimates constant, then it can boost the oil producer’s earnings per share by as much as 57 per cent.
“ONGC is a preferred play, given its relatively better production growth visibility and higher leverage to crude price due to the overseas oil portfolio,” JM Financial had said in a recent note.
However, not everyone believes that global crude oil prices will be able to sustain above the $65 a barrel mark through the year. Brokerage firm Ambit Capital said rising oil rigs in the US and patchy demand scenario suggest Brent futures would rather average around $60 per barrel in 2021-22.
Hindustan Petroleum Corporation’s Chairman and Managing Director MK Surana, in its post-earnings conference call, said oil prices could be around $50-60 a barrel going ahead, as he believes “oil-producing countries also would wish to bring in additional barrels.”
While rising global crude oil prices do make ONGC a tactical bet in the current market, recent comments by Prime Minister Narendra Modi on including natural gas in the ambit of the goods and services tax as well as government’s efforts to increase consumption of natural gas in the economy also improve the long-term outlook for the company.
“The largest beneficiaries of natural gas coming under GST would be gas producers like ONGC,” brokerage firm Ambit Capital said in a note.
Investor behaviour on the ONGC counter so far in February showed they expect the gains to sustain in the near term.
Trading volumes on the counter have jumped 53 per cent in February from November level, even as the stock rose 21 per cent. Similarly, there has been a substantial rise of 34 per cent in deliverable volumes compared with that in November, suggesting higher conviction of investors in the rally.