ONGC, Oil India Shares Skid Up To 20% in Two Days; What Should Investors Do Now?

Shares of state-owned oil & gas companies, Oil and Natural Gas Corporation (ONGC) and Oil India were trading lower for the second straight day, falling up to 6 per cent on the BSE in Monday’s intra-day trade after the government on Friday imposed a special additional excise duty of Rs 23,250 per tonne on crude oil production. In a wide-ranging notification by the government that has sought to curtail some of the outsized benefits reaped by domestic oil producers and crude oil refiners, the government has imposed special excise duties or windfall gains tax on the oil and gas industry.

The imposition of the new excise duty will severely restrict the benefits from elevated global crude oil prices to earnings of companies like ONGC and Oil India.

In the past two trading days, the stock of Oil India has slipped 20 per cent, while ONGC dipped 18 per cent. In comparison, the S&P BSE Sensex gained 0.1 per cent during the same period.

The tax on crude oil producers like ONGC, Oil India and Vedanta alone will fetch the government Rs 69,000 crore annually considering 29.7 million tonnes of oil production in 2021-22 fiscal (April 2021 to March 2022), the PTI reported quoting two sources.

Analysts at Motilal Oswal Financial Services cut the realizations of ONGC and Oil India to $60/bbl each for 2Q-3QFY23 and left the same unchanged for 4QFY23 onwards. “We also assume that the royalty and cess would be calculated on the realized price and the benchmark. At $100/bbl, these two would be equivalent to the additional reduction in realization by $12/bbl. As a result, we cut our EPS of ONGC/ Oil India by 29 per cent/25 per cent for FY23E, respectively,” the brokerage firm said in oil & gas sector update.

However, the brokerage firm reiterates its BUY rating with revised target prices of Rs 171 and Rs 364 for ONGC and Oil India, respectively. The key risk remains the continuation of the windfall tax even if the oil price falls below $100/bbl, it said.

“For ONGC and OIL, we bake in a lower net crude oil price realisation of USD 80/70 per bbl (net of the new SAED) vs USD 93/79 per bbl earlier for FY23/24E, to factor in the USD 30/40 per bbl impact of SAED for FY23/24E. However, the duration of these taxes is unclear,” analysts at HDFC Securities said in its sector update.

“We understand that these additional levies would be reviewed every 15 days, giving rise to optimism that these levies will be reduced/ withdrawn as inflation gets under control and/or petroleum product prices decline,” the brokerage firm said.

However, brokerage firm JPMorgan downgraded its rating on the stock to ‘neutral’ from ‘buy’ earlier and cut its price target 26 per cent to Rs 155 as it sees a sharp cut in earnings estimate going ahead.

The brokerage said that the fixed additional tax is sharply negative for the stock. Analysts believe that the tax will impose a heavy burden on ONGC given that it is a fixed quantum instead of an ad valorem tax that depends on the actual sales of the company.

The additional excise duty will reduce ONGC’s realisations by as much as $35-40 per barrel going ahead.

Similarly, Brokerage Goldman Sachs cut its estimate for ONGC’s operating profit for 2022-23 and 2023-24 by 23 per cent each resulting in its price target moderating to Rs 210 from Rs 285.