Varanasi Stock：ONGC, Oil India shares slip up to 6% on falling crude prices. Here is what analysts say

Shares of ONGC and Oil India (OIL) dropped by 3% to Rs 287.30 and 6.4% to Rs 570, respectively, on BSE following a sharp decline in crude oil prices, which usually negatively impacts their profit margins.

Crude oil prices have plummeted to nearly three-year lows following a downward revision of demand forecasts by OPEC, primarily driven by reduced Chinese demand. In its monthly report released yesterday, OPEC lowered the global oil demand forecast for 2024 to 2.03 million barrels per day, down from the previous estimate of 2.11 million barrels per day.Varanasi Stock

Chinese demand growth was also revised downwards to 650,000 barrels per day, compared to 700,000 barrels per day in the previous report.

Crude prices bounced on Wednesday as concerns about Tropical Storm Francine disrupting the supply of oil outweighed worries about demand.

“Crude oil prices below $70 per barrel for a long period can hurt the earnings of upstream companies, and hence we are witnessing selling pressure in upstream companies today,” said Sunny Agrawal, Head of the Retail Fundamental Desk at SBI Securities.

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However, this situation is favorable for India from a macro perspective and benefits many sectors like paints, airlines, tyres, FMCG, etc., added Agrawal.

Brent crude futures climbed 36 cents, or 0.52%, to $69.55 a barrel by 10:00 am IST, while U.S. crude futures were at $66.08 a barrel, up 33 cents, or 0.5%.

Meanwhile, the Nifty Oil & Gas index was trading 1.1% lower around 11:30 am, with IGL, Indian Oil Corporation, Hindustan Petroleum, and Bharat Petroleum trading down by 1.5% to 2%.

Following the sharp decline in crude prices, this is how brokerages view the sector and the mentioned stocks:

ONGC: Accumulate; Target price: Rs 329 | Oil India: Buy; Target price: Rs 786

The domestic brokerage firm believes that the gas produced from new wells will see a 20% premium over the APM price, which is determined monthly at 10% of the imported Indian crude basket and capped at USD 6.5/mmBtu.

Consequently, incremental gas produced by ONGC and OIL will benefit from better realization.

“For ONGC, we project 3.4% and 7.2% CAGR volume growth in oil and gas production over FY24-26E to 22.6 mmt and 23.7 bcm, respectively. Similarly, for OINL, we project 8% and 16% CAGR volume growth in oil and gas production over FY24-26E to 3.9 mmt and 4.3 bcm,” said Prabhudas Lilladher in its report.

ONGC: Buy | Oil India: Buy

For upstream companies, ICICI Securities believes that the current dip is yet negligible for earnings. If these low oil prices persist, upstream companies could see a 3% downgrade in standalone earnings, which may be exacerbated by a decline in their downstream subsidiaries as well.

In the current environment, the domestic brokerage firm remains positive on OIL India and ONGC. However, ONGC and OIL India will likely see lower EPS estimates due to softer net realizations, but the effective reduction is only USD 2/bbl as of now, or less than 3% versus current estimates.

Nuvama on ONGC: Reduce | Target price: Rs 232

ONGC is set to disappoint as market exuberance contradicts missed production targets and oil prices plunge below the critical USD 75 threshold. Nuvama cautioned that ONGC has repeatedly missed guidance. Notably, past production has consistently fallen by a 3.2% CAGR and 1P reserves by 3.3% over FY19–24. KG production guidance has nearly halved as well for this high-cost ultra-deep block.

Additionally, earnings are poised for a free fall as the USD 75/bbl crude threshold has been breached while the USD 67.5/bbl precipice for gas is within sightSimla Wealth Management. In contrast, only 18% of the Street is bearish on ONGC, indicating excessive exuberance.

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

Jaipur Wealth Management