Recommendation from Petroleum and Natural Gas Sectors

This section gives a recommendation of a stock having a stock price below Rs 150 with sound fundamentals and expected to give handsome returns over a one-year time horizon.

Oil and Natural Gas Corporation Ltd : OIL IS WELL

HERE IS WHY
✓Established track record
✓Healthy cash flows
✓Long-term growth prospects

The Russian invasion of Ukraine has had humanitarian and economic repercussions worldwide. Before the war escalated, oil prices were rising anyway globally due to rising demand. Nevertheless, when Russia attacked Ukraine, the price of crude oil on the global market rose from USD 76 per barrel in January 2022 to over USD 110 per barrel on March 4, 2022. Despite fall in the prices of other commodities for many other reasons, crude oil price has remained stubbornly higher. One company that is going to benefit out of higher crude oil price is ONGC Limited.

ONGC is the largest crude oil and natural gas company in India, contributing around 71 per cent to Indian domestic production. ONGC was established in 1956 by the Government of India for oil exploration. With 60+ years of oil exploration, ONGC has discovered eight out of nine producing basins of India. Crude oil generates 70 per cent of the company's revenue, followed by natural gas at 17 per cent and value-added goods at 13 per cent. Products like LPG, naphtha, ethane propane, butane, and excellent kerosene oil are among its value-added offerings. Geographically, India accounts for 93.5 per cent of revenue, with the remaining 6.5 per cent coming from overseas trade. The ONGC group of companies include ONGC Videsh, which is in charge of the international operations. The group also includes HPCL, the second-largest oil marketing company in India with 18,600 outlets, and Mangalore Refinery and Petrochemicals Limited. In addition, it also has PMHBL, which is in charge of transporting petroproducts from MRPL refinery to various Karnataka locations. 

The company holds a 5 per cent ownership in the India Gas Exchange, the country's first gas exchange to offer an automated trading platform for natural gas. The organisation plans to invest ₹31,000 crore in oil and gas exploration over the next three fiscal years, FY22–25. ONGC’s standalone revenue rose 83.8 per cent YoY to ₹42,321crore in Q1FY23 owing to a surge in oil prices, driven by supplydemand imbalance. Its EBITDA jumped 120.9 per cent YoY to ₹25,489 crore. EBITDA margin also expanded by 1,010 bps YoY despite higher operating expenses, offset by solid top-line growth and better realisation

On July 1, India joined a growing number of nations that tax energy corporations' windfall gains. Petrol and aviation turbine fuel export duties were imposed at ₹6 per litre and ₹13 per litre, respectively. Domestic crude output was likewise taxed at ₹23,250 per tonne. Going ahead we believe that it will come down and eventually become zero and will be able to retain more cash. This would enhance corporate share price and valuation, benefiting the government most as it is the largest shareholder of the company. 

This route will also allow the company to retain a reasonable amount of money for exploring oil and gas in unknown areas and bringing lesser resources to production, which will help the nation cut down on imports. The current dividend yield of the company is 8.04 per cent. The ROE and ROCE of the company is 19.5 per cent and 16.8 per cent, respectively, and currently the stock is trading at a PE 3.30x. Due to supplydemand imbalance, current global scenario, higher dividend yield of the company and strong fundamentals we recommend to BUY this scrip.