Why ONGC & Oil India Shares Fell?
In an unexpected move, the government announced an increase in the royalty rate on onshore crude oil production, just a month after announcing a cut.
In fact, the royalty on offshore oil and gas production has not been changed, while that of onshore has been cut further.
The new effective royalty rate of 13.33% on crude production from onshore fields, which is higher than the 10% announced on May 8. The new rate is still lower than the 16.67% rate applicable before.
Additionally, the benefit of standardized ad valorem deductions of 20% and 15% for nominated and other blocks, remain in place.
What Did CLSA, Kotak Say On The Royalty Increase?
According to CLSA, the move could impact ONGC’s Earnings per Share (EPS) by 2% and Oil India’s by 9%.
“This royalty flip flop may be seen as an irritant and may make investors extrapolate more negative government action, but we would disagree,” CLSA wrote in its note.
The brokerage said that it sees this move as a one-off measure to protect state government revenues.
On the other hand, Kotak Institutional Equities expects this move to fetch between ₹2,300 crore to ₹2,500 crore to the government.
It also expects a negative 1% to 1.5% impact on ONGC and a higher 5% to 6% impact on Oil India’s EPS.
“While such policy flip-flops are disappointing, we remain confident that fiscal stability and economic equilibrium provided in amended Acts and PNG rules are here to stay,” Kotak wrote in its note, adding that ONGC remains its preferred pick.
Shares of ONGC are trading 1.3% higher on Thursday at ₹255.2. The stock is down 17% from its 52-week high. After a 10% fall on Wednesday, shares of Oil India had opened higher on Thursday due to a rise in global crude prices, but has reversed those gains soon after. As of Wednesday’s close, shares of Oil India were 10% away from their 52-week low levels.
