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Shares of state-owned oil exploration & production companies – Oil Natural Gas Corporation (ONGC) and Oil India – rallied up to 5 per cent on the BSE in Wednesday’s intra-day trade as oil prices surged over 7 per cent on Tuesday to their highest levels since 2014.
Crude oil prices extended gains as the conflict in Ukraine escalated fears of lower supply from the top oil exporter. Western countries slapped fresh sanctions on Russia in response to the invasion of Ukraine, and Russian President Vladimir Putin responded by putting his country’s nuclear deterrent on a high alert.
Brent futures rose $7.00, or 7.1 per cent, to settle at $104.97 a barrel, their highest close since August 2014, as a global agreement to release crude reserves also failed to calm fears about supply disruptions from Russia’s invasion of Ukraine, the Reuters reported.
Among the individual stocks, Oil India surged 5 per cent to Rs 234.25, while ONGC gained 4.6 per cent at Rs 168.05 on the BSE. In comparison, the S&P BSE Sensex was down 1 per cent at 55,649 at 09:30 am. In the past six months, ONGC and Oil India outperformed the market, rallied 41 per cent and 30 per cent, respectively, as against a 3.8 per cent decline in the benchmark index.
Earnings outlook for upstream PSUs has improved considerably given the recent rise in crude oil prices at above $90/bbl mark and expectation of a further steep hike in domestic gas price over H1-H2FY23 on current gas price of $2.9/mmBtu. High oil & gas prices would boost overall profitability of ONGC and OIL. However, oil and gas production are expected to recover gradually with majority of the growth being back-ended (i.e. by FY2024E-FY2025E).
“The recent sharp surge in crude oil prices and expectation of further steep hike in domestic gas prices from April 2022 would drive a 40 per cent CAGR in Oil India’s standalone profit after tax (PAT) over FY2021-FY2024E and improve RoE to 12.5 per cent (versus only 5.4 per cent in FY2021). Moreover, the recent stake increase in Numaligarh Refinery (NRL) could create long-term value for Oil India,” the brokerage firm Sharekhan said. It maintains a Buy rating on Oil India with a revised SoTP-based price target of Rs 290.
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