Prabhudas Lilladher sees oil price rebound to $75-80/bbl, upgrades ONGC and OIL ratings to ’buy’

Recent shifts in the global oil market, including ample supplies and softer demand, have caused Brent crude prices to drop to around USD 71 per barrel, a significant decline that has impacted upstream earnings. However, brokerage house Prabhudas Lilladher expects a recovery in oil prices, projecting a near-term rebound to $75-80 per barrel, as supply constraints are anticipated with OPEC+ delaying production increases.

Given the anticipated recovery in oil prices and improved gas realization, PL upgraded its rating on Oil and Natural Gas Corporation (ONGC) from ‘Hold’ to ‘Accumulate,’ with a target price of ₹329, based on 9x FY26 adjusted earnings per share (EPS), including the value of its investments. The firm also reiterated its ‘Buy’ rating on Oil India (OIL), assigning a target price of ₹786, based on 12x FY26 adjusted EPS, including the value of its investments.

Global Oil Market Dynamics and Price Expectations

The fall in Brent crude prices to $71 per barrel was primarily driven by resolving a dispute that had temporarily halted Libyan crude supply. This contributed to an oversupply amid weakening global demand, pushing prices down.

Using insights from Wood Mackenzie, PL's report noted that the marginal cost of production at the upper end of the cost curve is above $70 per barrel, indicating that prices are unlikely to remain below this threshold for an extended period. PL believes that oil prices will normalize around $75-80 per barrel in the near future.

Growth Projections for ONGC and OINL

PL remains optimistic about the production outlook for ONGC and OINL. For ONGC, PL has factored in a compound annual growth rate (CAGR) of 3.4 per cent in oil production and 7.2 per cent in gas production between FY24 and FY26, with volumes expected to reach 22.6 million metric tonnes (mmt) and 23.7 billion cubic meters (bcm), respectively. Similarly, for OIL, PL projects an 8 per cent CAGR in oil production and 16 per cent CAGR in gas production over the same period, with volumes anticipated to hit 3.9 mmt and 4.3 bcm.

OPEC+ Delays Production Hike

To support prices, the Organization of Petroleum Exporting Countries and its allies (OPEC+) have postponed their planned production hike by at least two months. PL noted that this decision should help stabilize oil prices and drive them back to the $75-80 per barrel range. Upstream companies, such as ONGC and OIL, have seen their net oil realization dip from the earlier levels of $75 per barrel, but PL expects this decline to be temporary as prices recover.

Gas Realization Set to Improve

The report also emphasized the positive outlook for gas realization in the coming years. Gas produced from new wells will enjoy a 20 per cent premium over the Administered Pricing Mechanism (APM) price, set monthly based on 10 per cent of the imported Indian crude basket, currently capped at $6.5/mmBtu. PL highlighted that the ceiling price is expected to rise to $6.75/mmBtu by FY26, further improving gas realization for upstream companies. This increase in gas pricing will benefit both ONGC and OIL, as gas produced from new wells will attract higher prices, boosting their revenue.

Despite the recent volatility in crude prices, PL remains confident that combining global supply adjustments and improved gas realization will benefit Indian upstream companies. With OPEC+ delaying its production hike and gas prices set to rise, ONGC and OINL are well-positioned for growth in the coming years, making them attractive investment opportunities.