Raising oil price forecast
* Except India, most other large economies appear to be recovering, resulting in Brent averaging USD67/bbl in FY22 YTD, despite OPEC+ easing oil production cuts (to ~5.8mnbopd by July’21 from ~8mnbopd in Apr’21) at their last meeting. This is 51% higher than the average of FY21.
* Although we expect increased production from the US and OPEC+ to outpace demand, resulting in our longer period forecast of USD50-60/bbl to be intact, we raise our FY22E/FY23E oil price forecast to USD60/bbl.
* As a result, we raise our FY22E/FY23E EPS forecast for ONGC and Oil India by 20-25%. We raise our target price for ONGC to INR150 (valuing it at 10x FY23E adjusted EPS, considering the potential increase in gas from the KG basin) from INR125 and Oil India to INR165 (as we lower our multiple to 7x FY23E adjusted EPS, factoring in potential capex and likelihood of an increase in debt with the acquisition of the Numaligarh refinery) from INR155. A change of USD5/bbl would result in a 10%/16% change in our EPS and 14%/17% change in our target price for ONGC/Oil India.
Recent spurt in oil prices
* After a growth of 1.1mnbopd in CY19, global oil consumption declined by a staggering 9mnbopd in CY20. Led by return to near normalization, EIA expects oil demand to grow by 5.5mnbopd/3.7mnbopd in CY21/CY22.
* As a result of the recovery in demand witnessed in early CY21, Brent rose by ~10% in FY22 YTD over 4QFY21. This despite OPEC+ raising oil supply by ~0.6mnbopd in May’21.
* We have also witnessed some recovery in demand of petroleum products, with SG GRM rising to USD2.7/bbl in FY22 YTD from USD1.8/bbl in 4QFY21.
Increased supply to outpace demand
* US oil rig count declined to a low of 244 in Aug’20 from 790 in early CY20, led by lower oil prices. But it has steadily increased to 448 in May’21 (still down 43% v/s Jan’20). We expect US oil rig count to keep on increasing as long as there is a visibility of USD50-60/bbl in oil prices.
* OPEC+ is still throttling supply of 7.4mnbopd (as in May’21), which may return to the market if current oil prices sustain.
* Iran, which has been producing 2.4mnbopd (+14% since Jan’21) due to sanctions, is also expected to ramp up its export to 2.5mnbopd post lifting of sanctions. As a result of the increased supply, we expect oil prices to remain in the USD50-60/bbl range.
Raising estimates for ONGC and Oil India
* Aligning with the changed circumstances, we raise our Brent forecast to USD60/bbl for FY22E/FY23E from USD55/bbl. Our analysis further suggests that for every USD5/bbl change in Brent prices on our revised estimate, our EPS for ONGC/Oil India changes by 10%/16%.
* ONGC is trading at 3.5x FY22E EV/EBITDA and 4.5x FY22E P/E. Oil India is trading at 5.1x FY22E EV/EBITDA and 5.5x FY22E P/E. We maintain a Buy on these stocks. The main risk to our estimates and recommendation would be threat to demand due to increased COVID-19 cases globally.
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