Kotak Institutional Equities has issued starkly different recommendations for India's two major state-run upstream oil companies. The brokerage maintains a 'Buy' rating on ONGC with a fair value of ₹360, implying a potential upside of 57% from the October 27 price of ₹230. In contrast, it retains a 'Sell' rating on Oil India with a fair value of ₹365, indicating a potential downside of 20% from ₹457. According to the brokerage report, the difference comes down to production prospects, oil and gas realisations, and the ability to benefit from higher prices. As per LiveMint, ONGC remains the brokerage's preferred pick in the upstream oil and gas space, supported by a stronger medium-term production outlook, improving gas realisations and attractive valuations.
Kotak's preference for ONGC rests on its medium-term production outlook and scope for better gas realisations. The brokerage highlights ONGC's partnership with BP for its Western Offshore asset, which accounts for around 70% of ONGC's output. New fields are expected to contribute to production growth, although the company has faced setbacks at its KG-DWN-98/2 project. The brokerage also sees support from pricing for new-well gas (NWG), which could improve realisations. Higher oil prices could support earnings, with Kotak increasing its FY27 earnings estimates by 16-17% for ONGC. Despite earlier setbacks, ONGC's outlook is improving, with higher realisations from new-well gas and production growth from new fields expected to support performance.
Oil India faces significant concerns over its longer-term oil production prospects. Kotak believes the company's limited reserves could lead to a decline in oil output after a near-term increase. While the company's gas production outlook is relatively better, weak oil and gas realisations and margins remain concerns. The brokerage has raised Oil India's fair value to ₹365 from ₹360, but maintains its 'Sell' rating due to these fundamental challenges. However, its gas production outlook remains relatively better, as noted by the brokerage.
The brokerage has raised its FY27 crude oil price assumption to $100 per barrel from $90 per barrel, while retaining its assumption of $75 per barrel for FY28 and the longer term. This revision comes amid continuing supply disruptions linked to the West Asia conflict, with dated Brent crude averaging $126 per barrel in October up to the report date. As per LiveMint, although oil flows through the Strait of Hormuz have recovered significantly, renewed attacks on Saudi infrastructure and oil tankers have heightened concerns over potential supply disruptions. Crude and product tanker rates have also climbed to multi-year highs. Kotak also notes that changes in upstream oil and gas policies have improved the operating environment, including amendments to the Oilfields (Regulation and Development) Act (ORDA), royalty reforms and the Samudra Manthan initiative. The pricing mechanism for new-well gas, linked to 12% of Brent crude, is considered favourable compared with earlier arrangements.
Despite increasing both estimates, Kotak's ratings remain unchanged - 'Buy' for ONGC and 'Sell' for Oil India. For ONGC, the brokerage sees potential from its Western Offshore partnership and gas pricing improvements. For Oil India, concerns about reserves, future oil output and margins continue to weigh on its outlook. The key difference between the two companies lies in their ability to convert favourable crude oil prices into sustainable production, better realisations and stronger earnings. ONGC therefore remains the brokerage's preferred upstream stock, with its production outlook, improving realisations and valuation comfort underpinning the preference.
