ONGC gets bullish calls from Morgan Stanley, Jefferies, stock shows up to 37% upside potential

Jefferies has recently initiated coverage on ONGC with a ‘buy’ rating, driven by favourable crude and gas reforms as well as improved profitability

Shares of Oil and Natural Gas Corporation (ONGC) gained on April 18 as Morgan Stanley has issued an ‘overweight’ call on the PSU stock with a target of Rs 304 per share. The brokerage expects the upstream oil company’s outperformance to continue, bolstered by improved capital allocation strategies.

Additionally, stable regulations are anticipated to support a steady 18-20 percent return on equity (RoE).

ONGC’s slow ramp-up in domestic production by the end of 2024 has been well communicated, adding to the positive outlook for the company, Morgan Stanley said.

The ONGC stock has gained over 5 percent in the last five trading sessions due to a surge in crude oil prices amid rising hostilities between Israel and Iran. The Brent crude prices have been hovering near $90 a barrel and are trading much higher than levels of $75-80 a barrel seen in February this year.

According to analysts, the upstream oil and gas producers as ONGC should benefit from higher crude prices.

Jefferies also recently initiated coverage on ONGC with a ‘buy’ rating, driven by favourable crude and gas reforms as well as improved profitability. The brokerage has set a target price of Rs 390 apiece, implying a potential upside of 37 percent from the previous close. The foreign brokerage also expects strong free-cash-flow (FCF) generation and net-debt reduction for the company.

Why Jefferies is bullish on ONGC

According to Jefferies analysts, ONGC stands to gain from a tight crude oil market, as the IEA (International Energy Agency). The government’s pragmatism has also allowed it to increase ONGC net realization to $75 even in the face of industry under-recoveries.

Also, Special Additional Excise Duty (SAED) or windfall tax will not apply to new KG-basin output, allowing for greater participation in the rise in oil prices.

Reforms to gas pricing are expected to add to earnings for ONGC, Jefferies added. Despite the higher operating expenses, analysts believe that KG basin production would be profitable, allaying a major investor concern. As a result of price reforms, net realization per barrel of oil equivalent (boe) increased.

Analysts at Jefferies anticipate the trend to continue through FY24–26 estimated. Additionally, after a 2 percent annualized decline in production over FY14-24E, ONGC’s domestic production is expected to return to growth over FY24-26.

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