ONGC share decline
There is continuous pressure on the shares of government oil company ONGC. In Monday’s trading, ONGC’s shares fell by about 3 percent to around Rs 230. With this, the fall in the stock that has been going on for four days deepened further.
It is believed that the reason behind this decline is the concern of investors. At present, investors seem to be worried about the company’s future production, crude oil prices and the increasing debt of subsidiary companies.
Why did the brokerage house give SELL call?
According to an ET report, Axis Capital, while initiating coverage on ONGC, has given ‘Sell’ rating to the stock and set its target price at Rs 205. This means that there is a possibility of further decline in the stock from the current level. The brokerage believes that ONGC may face many challenges in the times to come.
Concern increased due to decrease in production
ONGC’s biggest problem is its falling oil and gas production. Most of the company’s domestic production comes from old oil fields, where production naturally declines every year. In particular, the Mumbai offshore field, which was discovered about 50 years ago, still contributes a major part of ONGC’s total production. Although the company has signed an agreement with BP to improve this field, there is little hope of increasing production in the next few years.
Shock from crude oil prices also
ONGC’s earnings largely depend on crude oil prices. Due to increase in global oil supply and weak demand, there is pressure on prices. International agencies estimate that the supply of oil will increase rapidly in the coming years, while the pace of demand may remain slow. For this reason, the brokerage house has considered the outlook for oil prices to be weak, which may affect ONGC’s profits.
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Estimate of decline in profits
Axis Capital estimates that ONGC’s standalone profits may decline by about 20 percent between FY25 and FY27. The main reason for this is said to be low oil prices and continuous weakness in production. The current valuation also seems expensive to the brokerage, as the stock is trading above its long-term average.
Increasing debt of subsidiary companies
ONGC’s two big subsidiary companies ONGC Videsh (OVL) and ONGC Petro Additions Limited (OPaL) are also a cause of concern. These companies have huge debts and their earnings are not strong enough to easily repay the interest and loans. In such a situation, ONGC may have to provide financial assistance to these companies in the coming time, which will create additional pressure on the parent company.
Disclaimer: This article is for information only and should not be considered as investment advice in any way. TV9 Bharatvarsha advises its readers and viewers to consult their financial advisors before taking any money related decisions.