The earnings environment has turned favourable for upstream PSUs, given expectation of further 40-48% hike in domestic gas price to $8.5-9/mmbtu and elevated crude oil to >$100/bbl on geopolitical tensions. We expect a robust 18% PAT CAGR over FY22-FY24E for ONGC.
ONGC has earmarked an exploration capex of $4 billion to augment production and has guided for impressive 4%/8% CAGR in oil/gas production over FY22-FY25E. KG-DWN-98/2 to be the key driver of volume growth with peak oil/gas production potential of 45kbpd/12mmscmd in CY2024 and provide upside to our volume CAGR assumption of 2% over FY22-FY24E. Earnings outlook for OVL and MRPL has also turned favourable with crude oil price >$100/bbl and Singapore complex GRM >$20/bbl and is expected to support consolidated profits of ONGC.
We re-initiate coverage on ONGC with a Buy rating and PT of Rs. 200 as its CMP factors in oil price of only $60/bbl and ignores strong earnings tailwinds from high oil & gas price and dividend yield of 10-11%. Windfall tax is not justified as 60% of every $1/bbl rise in oil realisation goes to the government in the form of statutory levies, corporate tax, and dividend.
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