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ONGC Shares Tumble as Axis Capital Issues Sell Rating
Oil and Natural Gas Corporation (ONGC) shares experienced a significant decline on Monday, falling over 3% after brokerage firm Axis Capital launched coverage with a strong 'sell' recommendation. The brokerage set a price target of ₹205 per share, indicating a potential downside of 14% from its recent trading levels. This downgrade has cast a shadow over investor sentiment for the state-owned oil giant.
Production Challenges Persist
Axis Capital highlighted concerns regarding ONGC's domestic oil and gas production, which is heavily reliant on aging fields. These fields face a natural decline rate of approximately 7% to 7.5% annually. A substantial portion of the company's output, around 63% for oil and 74% for natural gas in FY2025, originates from the Mumbai offshore region, discovered over five decades ago.
While ONGC's collaboration with BP as a technical services provider for the Mumbai High field shows promise, Axis Capital forecasts that standalone production will continue its downward trend. The brokerage projects a compounded annual growth rate (CAGR) decline of 1.3% for oil and 0.4% for natural gas between FY2025 and FY2030.
Muted Oil Price Outlook Dims Earnings Prospects
The brokerage anticipates sustained pressure on crude oil prices due to rising global supply and moderating demand. The International Energy Agency (IEA) predicts global oil supply to increase significantly in calendar years 2025 and 2026, driven by expansions in non-OPEC and OPEC+ production. Concurrently, global demand growth is expected to remain subdued.
Based on this outlook, Axis Capital has modeled Brent crude prices at $66 per barrel for FY2026 and $65 per barrel for FY2027. Consequently, the firm estimates that ONGC's standalone profit after tax (PAT) could decline by as much as 20% between FY2025 and FY2027. A substantial increase in crude oil prices remains the primary upside risk for the stock, according to Axis Capital.
Subsidiaries Grapple with High Debt
Further concerns have been raised regarding the significant leverage within ONGC's key subsidiaries, ONGC Videsh (OVL) and ONGC Petro additions Ltd. (OPaL). Axis Capital estimates their respective net debts for FY26 to be approximately ₹31,100 crore for OVL, equivalent to 10 times its EBITDA, and ₹25,200 crore for OPaL, a staggering 53 times its EBITDA.
The financial situation at OPaL is particularly precarious, with cash flows insufficient to cover even its interest payments. Due to this high leverage, Axis Capital projects a negative equity value for OVL at ₹16,200 crore (or ₹13 per share) and for OPaL at negative ₹18,900 crore (or ₹15 per share). The brokerage believes ONGC will likely need to inject significant equity into these subsidiaries in the coming years to manage their debt obligations.
Market Reaction and Analyst Consensus
In response to the downgrade, ONGC shares dropped to an intraday low of ₹229.94 on Monday, before trading around ₹232.25. The stock has already seen a 6.4% decline over the past month. Despite Axis Capital's bearish stance, the broader analyst consensus remains positive, with 19 out of 31 analysts covering the stock recommending a 'buy', while six each suggest 'hold' and 'sell'.
Impact
This downgrade from a prominent brokerage highlights potential headwinds for ONGC, including operational challenges in mature fields and macroeconomic factors affecting oil prices. Investors will closely monitor the company's ability to manage its subsidiary debt and sustain production levels. The stock's performance will be sensitive to crude oil price movements and any strategic decisions regarding its subsidiaries.
Impact Rating: 7/10
Difficult Terms Explained
- Profit After Tax (PAT): The net profit remaining after all expenses, taxes, and interest have been deducted from the total revenue.
- EBITDA: Earnings Before Interest, Taxes, Depreciation, and Amortization; a measure of a company's operating performance.
- Leverage: The use of debt to acquire more assets or fund operations, which can amplify both gains and losses.
- Equity Value: The total value of a company's shares, calculated by multiplying the total number of outstanding shares by the current market price per share. A negative equity value indicates liabilities exceed assets.
- Compounded Annual Growth Rate (CAGR): The average annual growth rate of an investment over a specified period longer than one year.
- Brokerage: A firm that buys and sells stocks and other securities for clients.
- Initiated Coverage: When a financial analyst or brokerage firm begins to regularly publish research and recommendations on a specific company's stock.