ONGC share price drops over 2% after sharp fall in crude oil prices; analysts expect more 21% downside for the PSU stock

ONGC share price declined over 2% in early trade on Wednesday after a sharp fall in crude oil prices which is expected to negatively affect the company’s earnings. Oil and Natural Gas Corporation Ltd (ONGC) share price fell as much as 2.68% to ₹287.70 apiece on the BSE.

Crude oil prices tumbled to the lowest level in three years after OPEC cut its forecast for global oil demand growth in 2024 and also trimmed its expectation for next year, Reuters reported. The Organization of the Petroleum Exporting Countries (OPEC) said world oil demand will rise by 2.03 million barrels per day (bpd) in 2024, down from growth of 2.11 million bpd expected last month.

Brent crude oil prices slid by more than 3% on Tuesday and slipped below $70 a barrel level for the first time since December 2021.

Analysts believe ONGC’s earnings are poised for a free fall as the $75 per barrel crude threshold has breached while the $67.5 per barrel precipice for gas is within sight.

Nuvama Institutional Equities is of the view that ONGC is poised for a ‘double-barrelled free fall’ as the company is set to meet its volume growth guidance given that all past targets have been missed and crude oil prices have plunged below the critical $75 threshold.

ONGC as well as investors remain optimistic of its standalone ~12% and 27% oil and gas production growth guidance by FY27E, mainly from KG-98/2 block. In sharp contrast, the company has missed guidance every year for at least the past six years, which Nuvama believes calls for extreme caution.

“ONGC has not only reported a production decline of ~3.2% CAGR over the past five years, but a 3.3% CAGR fall in 1P reserves as well, suggesting a further production fall ahead. Given our cautious view on production guidance, we factor in growth of 1% / 5% oil / gas standalone production growth over FY24–26,” Nuvama said.

ONGC has also substantially lowered KG-98/2 peak oil and gas production guidance by 42% and 33% to 45 kbpd and 10 mmscmd since FY18. Moreover, production locks in a high drilling cost while the production guidance has been reduced meaningfully, risking the viability of the project.

Nuvama Equities’ analysis suggests an earnings impact of 24% for FY26E if crude price falls by $10 per barrel below the threshold of $75 level. Moreover, APM gas prices are pegged at a 10% slope to Brent, with a current ceiling of $6.5 per mmbtu, which is scheduled to be raised to $6.75 per mmbtu from FY26.

“With crude oil prices plunging below $70/bbl, the crude oil threshold of $67.5/bbl remains within sight and could shortly force a cut in APM gas prices as well,” Nuvama said.

With unlimited downside sub-$75 per barrel for oil and $67.5 per barrel for gas, the brokerage firm believes ONGC’s earnings are severely vulnerable to cuts. In contrast, only 18% of Street has a bearish view, indicating excessive exuberance.

Nuvama cuts earnings per share (EPS) estimates by 5% and 6% for FY25 and FY26 and reiterates ‘Reduce’ rating for ONGC shares with a target price of ₹232 apiece, implying a downside potential of over 21% from Tuesday’s closing price.

ONGC share price history

ONGC share price has been on a bearish trend recently as the stock has fallen over 7% in one week and more than 12% in one month. However, ONGC shares have gained 41% year-to-date (YTD) and have given more than 58% return in the past 12 months.

At 10:00 am, ONGC shares were trading 2.16% lower at ₹289.25 apiece on the BSE.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.