Whalesbook
Royalty Cuts Spark Rally
Shares of Oil and Natural Gas Corporation (ONGC) and Oil India surged on Tuesday, May 12, 2026, after the government made a major cut to royalty rates for domestic oil and gas production. This change, designed to encourage exploration and production, lowered royalties on onshore crude oil from 16.66% to 10%, offshore crude from 9.09% to 8%, and natural gas from 10% to 8%. The move is expected to add significant value, with CLSA analysts estimating a 7-9% boost for ONGC and 9-11% for Oil India, while easing concerns about higher taxes.
ONGC's stock rose about 5% to a high of ₹295.50, with strong trading volume. Oil India's shares gained over 7% to ₹490.85 intraday, strongly outperforming the broader market. This contrasted sharply with the benchmark BSE Sensex, which fell about 0.90% amid global economic worries. Both ONGC and Oil India have shown robust year-to-date gains in 2026.
Value, Risks, and Divergent Forecasts
The royalty cut offers a boost, but the situation is complex. ONGC's P/E ratio is around 8.31-9.96 with a market value of about ₹3.4 trillion. Oil India trades at a P/E of roughly 11.9-13.22 with a market cap of ₹740 billion. For comparison, Vedanta trades at a P/E as low as 6.31, making it appear more undervalued. This suggests the market is reacting more to the immediate policy relief for ONGC and Oil India than to their fundamental strength.
Global economic pressures add to these sector issues. Brent crude oil prices are around $105 per barrel, driven by tensions in West Asia. This volatility, along with a depreciating Indian Rupee hitting near 95.31 against the US dollar, worsens India's import costs and inflation worries. India's energy sector, which imports over 85% of its crude oil, is vulnerable to these changes.
Analyst views are mixed. CLSA initially set a ₹405 target for ONGC, but recent reports show varying opinions. Some analysts keep buy ratings with targets around ₹330-343. Others have lowered targets, with CLSA cutting its ONGC target to ₹320 and JPMorgan to ₹240. Goldman Sachs maintains a Sell rating. This mixed reception shows uncertainty about long-term impact and strategy execution. India's oil and gas sector is expected to grow, driven by natural gas demand, but faces challenges like complex geology and import reliance.
Lingering Risks for Oil Stocks
Despite the immediate stock surge, significant risks remain. The rally's future depends on volatile global oil prices, with forecasts varying widely. A sharp drop in crude prices could erase gains from royalty cuts. Furthermore, India's upstream sector, while aiming to boost domestic production, faces declining output from older fields, requiring major investment in new projects like the Daman Upside and KG basin.
The falling rupee not only raises crude import costs but also impacts foreign currency debt and operational expenses. Analyst reports often highlight the potential of new assets and partnerships, like ONGC's with BP Plc. However, declining output from older fields means reversing this trend needs consistent success and major investment. The stark valuation difference with peers like Vedanta suggests the market may see the oil and gas upstream sector as riskier, or that other companies are fundamentally stronger. The mixed analyst outlook, including downgrades and target revisions, shows concerns about growth execution and potential downside risks.
What's Next for ONGC and Oil India
The government's royalty cuts show commitment to boosting domestic oil and gas. This should support projected growth for India's oil and gas sector, forecasted to reach $21.56 billion by 2031, with natural gas output growing 7% annually through 2031. Analysts predict ONGC could achieve 5% annual growth in oil and gas output between FY26–28E, thanks to new offshore assets and projects. ONGC and Oil India's future performance will likely depend on their ability to turn policy changes into steady production growth while managing global and economic challenges. Analyst consensus for ONGC is around ₹343.33, suggesting a 22.79% upside. However, this average includes widely different targets, showing differing views on future prospects.