Attractive prospects of returns may draw investors to ONGC
, ET Bureau|
Updated: Dec 18, 2017, 08.08 AM IST
ET Intelligence group: The favourable risk-reward ratio could attract investors to India’s largest oil explorer company Oil & Natural Gas Corporation (ONGC) in the short run.
The ONGC stock, which is typically perceived as the best proxy play on crude oil prices, has risen 16 per cent in the past six months, while crude oil prices have gained 36 per cent in the same time.
Even the company’s smaller peer Oil India’s stock has moved in tandem with the crude oil’s trajectory. ONGC’s stock has underperformed due to fears of paying more for the pending HPCL acquisition, and the ongoing crisis in Venezuela, which could have hurt its dividend income. That’s why despite the rise in crude oil prices, ONGC’s stock has underperformed Oil India by 20 per cent in the past six months.
It also seems that the Street is excessively cautious on the stock due to such fears, but there are a few reasons why the ONGC stock could offer attractive risk-reward ratio to investors.
Traditionally, ONGC’s stock is ascribed with better price-earnings multiple (15-20 per cent higher) than Oil India owing to its significant hydrocarbon reserves, longer reserve life, and monthly production volumes.
The Street is ascribing the P/E target multiple of 10 times to arrive at a fair value for Oil India. This means the target P/E multiple of ONGC should be superior to it. The consensus earnings per share for ONGC for the next fiscal year is ?20. It means fair price should be in the range of ?220-240 per share, which is 18-25 per cent lower than current market prices. The production profile of ONGC is gradually improving with incremental crude oil from offshore fields and the significant increase in gas production volumes.
ONGC has guided for crude oil production of 26.02 million tonnes for FY19, and 29.5 billion cubic metre of gas in FY19, which implies growth of 1 per cent and 16 per cent YoY. It must be noted that hydrocarbon production of ONGC has been steady for the past couple of quarters.
The ONGC stock, which is typically perceived as the best proxy play on crude oil prices, has risen 16 per cent in the past six months, while crude oil prices have gained 36 per cent in the same time.
Even the company’s smaller peer Oil India’s stock has moved in tandem with the crude oil’s trajectory. ONGC’s stock has underperformed due to fears of paying more for the pending HPCL acquisition, and the ongoing crisis in Venezuela, which could have hurt its dividend income. That’s why despite the rise in crude oil prices, ONGC’s stock has underperformed Oil India by 20 per cent in the past six months.
It also seems that the Street is excessively cautious on the stock due to such fears, but there are a few reasons why the ONGC stock could offer attractive risk-reward ratio to investors.
Traditionally, ONGC’s stock is ascribed with better price-earnings multiple (15-20 per cent higher) than Oil India owing to its significant hydrocarbon reserves, longer reserve life, and monthly production volumes.
The Street is ascribing the P/E target multiple of 10 times to arrive at a fair value for Oil India. This means the target P/E multiple of ONGC should be superior to it. The consensus earnings per share for ONGC for the next fiscal year is ?20. It means fair price should be in the range of ?220-240 per share, which is 18-25 per cent lower than current market prices. The production profile of ONGC is gradually improving with incremental crude oil from offshore fields and the significant increase in gas production volumes.
ONGC has guided for crude oil production of 26.02 million tonnes for FY19, and 29.5 billion cubic metre of gas in FY19, which implies growth of 1 per cent and 16 per cent YoY. It must be noted that hydrocarbon production of ONGC has been steady for the past couple of quarters.
