OPEC+ to back Brent at $80 per barrel; ONGC scored highly on dividend payments

The state-owned Oil India and Oil and Natural Gas Corporation (ONGC) are the most likely Indian oil explorers to see success, with the Organization of Petroleum Exporting Countries and its allies (OPEC+) supporting Brent crude at $80 a barrel.

The domestic brokerage firm JM Financials stated in its most recent research that increased output from non-OPEC+ nations like the US, Brazil, Guyana, and Canada is the sole cause of the 1.8 mmbpd gain in the global oil supply in CY24, accounting for 95% of the growth.

According to the brokerage, OPEC+ output cuts are still expected to maintain the market in a little deficit in 1QCY24, and the deficit/surplus scenario for CY24 will depend on OPEC+ output cuts for the remainder of the year.

Over the last two to three years, OPEC+’s pricing power has increased for the following reasons:

– Due to US shale investors’ conservative capital expenditure, US oil output has remained at about 13 mbpd (compared to a pre-Covid peak of approximately 13.1 mbpd).

– OPEC+ has demonstrated a significant capacity to reduce output by about 10 mbpd in early CY20 in order to counteract the approximately 10% drop in global oil demand following COVID.

‘’Despite the recent rally, we maintain ‘buy’ on ONGC (unchanged TP of ₹300) and Oil India (unchanged TP of ₹500) given strong dividend play (of 5-6 per cent) and also because CMP is discounting ~$65/bbl net crude realisation,” stated JM Financials.

‘’…While our TP is based on $70/bbl net crude realisation, and various changes in windfall tax suggesting the government is fine with ONGC/Oil India making net crude realisation of ~$72-73/bbl. Every $5/bbl rise/fall in net crude realisation results in increase/decrease in our EPS and valuation by 6-9 per cent,” added the venture.

For ONGC/Oil India, a Brent crude price between $75 and $80 per barrel is a sweet spot since it reduces the possibility of ad hoc fuel subsidy burden and increases visibility for net crude realization of $75 per barrel. ONGC and Oil India are trading at 6.4x FY26E EPS and 0.9x FY26E BV and 8.4x FY26E EPS and 1.1x FY26E BV, respectively, at CMP.