Oil Demand Decline Will Erode Future Revenues Despite Renewables

Key Takeaways

• Declining oil demand, tighter climate regulations, and rising renewable adoption threaten ONGC's core revenue, profitability, and future growth.
  
• Aging reserves, higher exploration costs, and tougher financing conditions create persistent risks for production, earnings stability, and investment.
  
• Strategic investments in production and renewables, efficient cost control, and strong reserve replacement position the company for long-term growth and improved profitability.

Catalysts

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

• The accelerating global adoption of energy transition policies and rising investments in renewable energy are set to structurally erode long-term oil and gas demand, which would diminish ONGC's core revenue base over the next decade.
  
• With electric vehicle usage increasing and battery technology rapidly advancing, demand for transportation fuels is expected to decline, threatening future topline growth from ONGC's legacy oil assets.
  
• Intensifying climate-focused regulations and more rigorous carbon pricing are projected to raise operational costs considerably, compressing the company's net margins and reducing profitability.
  
• Ageing oil fields and declining reserves, combined with a sharp increase in exploration costs and a higher number of dry wells-as evidenced by 2025 write-offs and mounting capex-signal that sustaining current production and earnings will require growing expenditure and may pressure net income if new reserves are not found at pace.
  
• Growing investor and lender reluctance to finance fossil fuel projects, as well as the increased frequency of extreme weather events and operational disruptions related to climate change, will further limit ONGC's access to affordable funding, escalate maintenance costs, and risk persistent volatility in earnings and cash flows.

Oil and Natural Gas Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Oil and Natural Gas compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Oil and Natural Gas's revenue will decrease by 3.0% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 5.5% today to 7.0% in 3 years time.
• The bearish analysts expect earnings to reach ₹421.2 billion (and earnings per share of ₹33.45) by about July 2028, up from ₹362.3 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 9.0x on those 2028 earnings, up from 8.5x today. This future PE is lower than the current PE for the IN Oil and Gas industry at 19.6x.
• 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 13.65%, as per the Simply Wall St company report.

Oil and Natural Gas Future Earnings Per Share Growth

Risks

• The company has consistently achieved a reserve replacement ratio above one for nineteen consecutive years and is rapidly increasing exploration activity, which strongly suggests long-term production growth, directly supporting revenue and future earnings stability.
  
• High levels of capital expenditure, including record drilling activity and investment in both conventional and renewable businesses, reflect a strategic focus on expanding productive capacity and diversifying operations, which can drive higher long-term revenues and support profit margins.
  
• ONGC is successfully enhancing oil and gas production from both existing and new assets, with projects such as KG Basin and Daman set to deliver significant volume increases in the next few years, potentially boosting topline revenue and cash flow.
  
• Significant ongoing cost control measures, including sharp reductions in rig rates and logistics costs, are materially improving operational efficiency; this is likely to drive sustained net margin improvement even in volatile commodity environments.
  
• The company is rapidly scaling its renewable energy capacity, already achieving 2.5 GW with a plan to reach 10 GW by 2030, positioning ONGC to benefit from both the energy transition and increased investor preference for ESG-aligned businesses, which could enhance the long-term premium embedded in its share price.

Valuation

• The assumed bearish price target for Oil and Natural Gas is ₹205.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Oil and Natural Gas's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹360.0, and the most bearish reporting a price target of just ₹205.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be ₹6053.4 billion, earnings will come to ₹421.2 billion, and it would be trading on a PE ratio of 9.0x, assuming you use a discount rate of 13.7%.
• Given the current share price of ₹245.55, the bearish analyst price target of ₹205.0 is 19.8% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• 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.