Oil prices to normalize back to USD75-80/bbl in the near term: PL Capital- Prabhudas Lilladher
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PL Capital- Prabhudas Lilladher, one of the most trusted financial services organisations in India, in its latest Oil & Gas Report stated that Recent global developments leading to ample supplies amid weaker demand prospects have pushed Brent oil prices to lows of ~USD71/bbl. While upstream earnings are currently impacted, with the OPEC+ delaying its planned rise in production, we expect oil prices to rebound to USD75-80/bbl in the near term. Thus, net oil realization should bounce back to ~USD75/bbl. Additionally, APM price is set to rise in FY26E and gas produced from new wells would attract premium pricing. These bode well for upstream players. We upgrade our rating on ONGC from ‘Hold’ to ‘Accumulate’ with a TP of Rs329 based on 9x FY26 adj EPS and adding the value of investments. We maintain ‘Buy’ on OINL with a TP of Rs786 based on 12x FY26 adj EPS and adding the value of investments.
Normalization of crude prices likely: Last week, reports of resolution of a dispute that had halted Libyan crude supply, led to the Brent falling to ~USD71/bbl owing to ample supplies amid a weak demand outlook. As per Wood Mackenzie, marginal cost of production at fag end of the cost curve is upwards of USD70/bbl. Thus, oil prices are not expected to remain below USD70/bbl for long.
OPEC+ delays production hike: In response to the lower oil prices, OPEC+ decided to postpone its planned increase in oil production by at least 2 months. Thus, we expect crude oil prices to reach USD75-80/bbl levels again. While upstream companies’ net oil realization has fallen from ~USD75/bbl, we do not anticipate this to continue for long.
Gas realization to increase: Gas produced from new wells will see a 20% premium over the APM price, which is determined monthly at 10% of the imported Indian crude basket and capped at USD6.5/mmBtu. Consequently, incremental gas produced by ONGC and OINL will benefit from better realization. Additionally, the APM ceiling price is set to be revised to USD6.75/mmBtu from FY26. Thus, gas realization looks to be rising for upstream companies.
Projected growth in volumes: For ONGC, we build in 3.4% and 7.2% CAGR volume growth in oil and gas production over FY24-26E to 22.6mmt and 23.7bcm, respectively. Similarly, for OINL, we build in 8% and 16% CAGR volume growth in oil and gas production over FY24-26E to 3.9mmt and 4.3bcm.
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