Shares of Oil and Natural Gas Corporation (ONGC) rallied as much as 6% to the day’s high of Rs 298 on the BSE on Tuesday after Hong Kong-based brokerage CLSA termed the government’s latest move to cut upstream royalty rates a “big positive” for the state-run explorer and the broader upstream oil and gas sector.
In a surprise decision, the government reduced the royalty charged on crude oil and natural gas production, a move CLSA said could increase the fair value of ONGC by 7-9% and that of Oil India by 9-11%. As a result, Oil India shares also gained 7.5% to trade at a day’s high of Rs 491.
The global brokerage has a ‘High Conviction Outperform’ rating on the stock and a target price of Rs 405, an upside of 44.4%.
The brokerage said the move is significant not only because of the direct earnings benefit, but also because it eases investor fears around the possibility of a fresh windfall tax similar to the one imposed in 2022.
According to CLSA, concerns around higher upstream taxation had weighed heavily on ONGC and Oil India, making them among the weakest-performing global upstream energy stocks.
For nomination blocks, which account for a substantial portion of ONGC’s and Oil India’s production, the government has revised the royalty framework.
The effective royalty rate on onshore crude production has been reduced from 16.66% to 10%, while offshore royalty has been lowered from 9.09% to 8%. Royalty on natural gas has also been reduced to 8% from 10% earlier.
CLSA noted that the changes imply a blended royalty reduction of around 3 percentage points for ONGC’s crude production, given that nearly one-third of its output comes from onshore fields. At crude prices of $80–100/barrel, the brokerage estimates this could raise ONGC’s net crude realisation by $2.4-3 per barrel.
Including lower gas royalties and GST-related savings, CLSA estimates the changes could add around Rs 2.5-Rs 3 to ONGC’s earnings per share. Applying an 8x price-to-earnings multiple, the brokerage sees a fair value increase of Rs 20-24 per share, equivalent to 7-9% of the current market price.
For Oil India, where all production is onshore, CLSA estimates a sharper reduction in royalty rates, translating into an increase in net realisation of $5.3–$6.7 per barrel at crude prices of $80-100. The brokerage said this could add Rs 5.2-Rs 6.4 to Oil India’s EPS, implying a fair value boost of Rs 42-Rs 51 per share.
CLSA also highlighted the broader policy signal from the government, especially when crude oil prices are rising, and fiscal pressures remain elevated. The brokerage said the royalty cut suggests the government is focused on encouraging upstream exploration and production rather than increasing taxes on producers.
The brokerage reiterated its “High Conviction Outperform” rating on ONGC, saying the stock is effectively pricing in Brent crude at just $65 per barrel, compared with Oil India at $80 per barrel. CLSA sees a potential upside of 43% for ONGC, along with a dividend yield of 7% at $80/barrel oil prices.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)
