Bid & Tender
Three Reasons Why ONGC Continues to Trade Far Below the Target Price

Date : Jun 23, 2017

According to the source, the worst first five months in the last six years and a potential buyout that may increase debt hasn’t deterred analysts from maintaining their ‘buy’ rating on India’s largest explorer Oil and Natural Gas Corporation Ltd. The divergence between ONGC’s current share price and target set by analysts is more than 30 percent. Yet, nearly two-thirds of analysts tracking the company recommend a 'buy'.

 

Falling Crude Prices

 

Nitin Tiwari of Antique Stock Broking blames the fall in global crude prices as the only reason for the drop in stock prices. An extension in planned production cut by the Organization of the Petroleum Exporting Countries has failed to take crude prices higher, as the U.S. continues to ramp up shale gas production. Brent crude prices have fallen 20 percent year-to-date, hurting oil explorers' realisation.

 

Every $5 per barrel fall in oil prices hurts ONGC’s earnings per share by 5-7 percent, said brokerage house Credit Suisse. Tiwari who has retained a 'buy' rating on the stock in his latest report on May 30, believes that the extension in production cuts will help take prices higher in the long run.

 

Dipping Margins In Gas Business

 

The government's new pricing gas pricing rule has led to a drop of more than 50 percent to $2.48 per million British thermal unit. ONGC, which gets a large chunk of its revenue from gas, had earlier said that the government-mandated gas prices is significantly lower than the cost of production. Natural gas is no more a profitable business, as cost of production is significantly higher than current gas prices.

 

Dinesh Saraf, Chairman and MD, ONGC

 

ONGC Chairman and Managing Director Dinesh K Sarraf said the company lost Rs 50.10 billion in revenue on natural gas business, and about Rs 30 billion in profit last year due to lower gas prices.

 

ONGC-HPCL Buyout

 

Another overhang on the ONGC stock price is its potential buyout of government’s stake in Hindustan Petroleum Corporation of India Ltd.

 

The government’s plan to create an energy giant would increase ONGC’s debt burden as the company will have to shell out more than Rs 280 billion to buy 51.11 percent stake.

 

ONGC had cash worth Rs 166.48 billion, and a total debt of Rs 556.82 billion, as of March 31, 2017.

 

The transaction will have no impact on operations of HPCL, but ONGC will see a notable increase in debt for purchase of the government’s stake.

 

CLSA’s Sector Outlook on Oil and Gas

 

Morgan Stanley, the only brokerage tracked by Bloomberg to have a ‘sell’ rating on the stock cites lack of organic growth in the near future.

 

Overall consolidated production went up driven by contributions from acquisitions.

 

Morgan Stanley Note on ONGC Q4 Earnings

 

The brokerage house also mentioned that gas production in India which is expected to grow is less profitable for the company, while the oil business, i.e., the more profitable segment growth is expected to largely remain flat.