ONGC shares rise after natural gas price hike: Outlook on shares

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ONGC shares rose more than 2% on Friday afternoon, after the government more than doubled the price of natural gas yesterday. Analysts are bullish on the stock, as upstream gas producers are expected to benefit from the higher prices going forward. Here are the major highlights.

 

Why has the government doubled gas prices?

  • The government has increased gas prices for the 2nd time in a row amid increasing  global prices. 
  • The price was raised from $2.9 an mmBtu to $6.13/barrel, a rise of more than 110%. The APM (Adjusted Price Mechanism) gas price is based on a volume-weighted annual average prices of four global benchmarks—US Henry Hub, Canada Alberta gas, UK NBP, and Russian Natural Gas—with a lag of one quarter. Hence, the latest prices will be applicable from April 1st.  
  • Most brokerages had expected at least a twofold rise in Gas Prices. Hence, the price hike has been largely in-line with estimates.

Positive for ONGC

  • Higher gas prices come as a major positive for oil and natural gas producers such as ONGC. 
  • According to industry estimates, for every $1/mmBtu change in the administered price, ONGC and Oil India’s FY23 standalone earnings per share will rise by 10% and 12%, respectively.

Brokerage radar

  • Global brokerage firm JP Morgan has noted that the risk-reward remains favorable for ONGC. It has an “Overweight” rating on the stock with a target price of Rs 250. At current price, ONGC trades at a dividend yield of 9-10%. 
  • CLSA sees a 160% rise in ONGC share price, noting that the reforms are unlikely to be rolled back amid higher global energy prices. 
  • Morgan Stanley noted that it expects another 25% hike in October-2022. It prefers gas producers such as ONGC and Reliance Industries. 
  • According to Nomura, upstream gas producers like Oil & Natural Gas Corp are expected to benefit from the higher APM prices, and their gas segments will turn profitable in FY23.
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