BP Partnership And Renewables Focus Will Boost Future Production

Key Takeaways

• ONGC's collaboration with global partners and CapEx on reserves are expected to increase production and improve earnings.
  
• Expanding renewables and removing gas duties could diversify revenue and enhance long-term earnings.
  
• Declining production, regulatory risks, and delayed green energy investment pose revenue and margin challenges amid geopolitical tensions and volatile oil prices.

Catalysts

Engages in the exploration, development, and production of crude oil and natural gas in India and internationally.

• ONGC has reversed the declining trend in crude oil and natural gas production, with initiatives aimed at boosting production in the coming years, which could positively impact future revenues.
  
• The company's steady CapEx program to strengthen its reserve base and collaboration with global leaders for production enhancement portend an increase in production volumes and potentially improved earnings.
  
• The international collaboration with BP for production enhancement in the Mumbai High Field is expected to significantly boost production by up to 60% from baseline levels over a 10-year period, potentially supporting revenue growth and margin improvement.
  
• Removal of SAD (Special Additional Duty) and 20% premium for gas from new wells is likely to improve ONGC's resource-generating capability, positively affecting net margins and overall earnings.
  
• ONGC's focus on expanding its renewables portfolio with targets like reaching 10 gigawatts by 2030 and a significant increase in green energy investments could diversify revenue streams and enhance long-term earnings.

Oil and Natural Gas Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Oil and Natural Gas's revenue will grow by 5.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.5% today to 8.3% in 3 years time.
• Analysts expect earnings to reach ₹583.0 billion (and earnings per share of ₹47.65) by about April 2028, up from ₹390.1 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting ₹650.4 billion in earnings, and the most bearish expecting ₹408.3 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 10.3x on those 2028 earnings, up from 8.1x today. This future PE is lower than the current PE for the IN Oil and Gas industry at 17.0x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 16.19%, as per the Simply Wall St company report.

Oil and Natural Gas Future Earnings Per Share Growth

Risks

• Declining production trends, especially in mature fields like Mumbai High, have been a significant concern, affecting the company's revenue and net margins.
  
• Although ONGC plans to increase reserves and production volumes, the financial performance has been muted due to lower oil prices and higher depreciation, which can impact the earnings.
  
• The company's late entry into the renewable energy sector and the perceived missed opportunities in green energy investments could limit potential revenue growth and diversification benefits.
  
• The ongoing geopolitical issues, particularly related to Russian operations and pending sanctions, may affect cash flow and earnings.
  
• Given the dependence on government policies and regulatory decisions, any unfavorable changes or imposition of duties like SAED could impact ONGC's revenue and margins adversely.

Valuation

• The analysts have a consensus price target of ₹303.387 for Oil and Natural Gas based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹416.0, and the most bearish reporting a price target of just ₹210.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹7053.9 billion, earnings will come to ₹583.0 billion, and it would be trading on a PE ratio of 10.3x, assuming you use a discount rate of 16.2%.
• Given the current share price of ₹250.64, the analyst price target of ₹303.39 is 17.4% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.