Government Policy Change Boosts Oil Sector

The Indian government's new royalty rates for oil and gas producers mark a shift from focusing on taxes to encouraging domestic output. This change benefits companies like Oil and Natural Gas Corporation (ONGC) and Oil India, moving the focus from potential heavy taxes to supportive government policy. CLSA maintains an 'Outperform' rating on ONGC with a target price of Rs 405, seeing significant potential upside.

Royalty Cuts and High Crude Prices Drive Gains

Starting May 12, 2026, royalty rates were cut significantly. For onshore oil and gas, the rate dropped from 16.66% to 10%. For offshore blocks, it fell from 9.09% to 8%. This policy shift is notable as Brent crude is trading around $105.27 per barrel, well above the $65-$80 range CLSA believed ONGC was factoring in. CLSA estimates these cuts could boost ONGC's earnings per share by Rs 2.5-Rs 3, adding 7-9% to its fair value. The stock rose up to 7% on May 12th, 2026, following the announcement.

ONGC's Valuation vs. Peers and Analyst Views

Despite the positive policy move, ONGC's valuation remains complex. It currently trades at a Price-to-Earnings (P/E) ratio of about 9.30, much lower than its peer Oil India (which ranges from 11.94 to 17.36). While ONGC is a much larger company in value, its lower P/E suggests it's valued less per dollar of earnings. ONGC's P/E has varied widely in the past, from a high of 141.8x in March 2021 to a low of 4.5x by March 2023. Reports from March 2026 also indicated ONGC's oil production growth was flat or declining, while Oil India saw stronger increases. The wider Indian oil and gas sector is expected to grow earnings by about 7.1% annually, though recent sector performance has seen pullbacks, partly due to Reliance Industries' dips. Analyst views are split, with CLSA very positive, but JPMorgan suggesting lower price targets and Goldman Sachs rating the stock 'Sell'.

Lingering Risks and Divided Analyst Opinions

While the royalty cut is good news, it doesn't eliminate all industry risks for ONGC. Its stock value, even with the recent policy boost and a P/E around 9.3x, is still seen by some as lower than its potential. A key concern is ONGC's operational performance, which lagged Oil India in production growth as of March 2026, raising questions about future output increases. The current high crude prices ($105.27/bbl) also come with market volatility. Potential future policy changes, like new gas pricing rules or a return of windfall taxes, remain underlying risks. The difference in analyst opinions, with some recommending 'Buy' and others 'Sell', highlights uncertainty about whether policy benefits or operational and market risks will dominate long-term.

What's Next for ONGC

CLSA's target price of Rs 405 for ONGC suggests significant upside, based on scenarios where the stock currently prices Brent crude at $65/bbl. Current prices are much higher than this. Other analyst price targets from March 2026 varied, with some around ₹292.46 and others between ₹330-343. With high Brent crude prices and supportive government policy, the immediate outlook is positive. However, investors will watch closely to see if ONGC can convert these factors into steady production growth and better financial results, especially given mixed analyst views and past operational issues.