ONGC, Oil India shares rise 9% after CLSA flags positive read through of royalty cut

The government has reduced effective royalty rates on crude oil and natural gas production in a move aimed at improving the economics of India's upstream energy sector.

The revised structure is expected to benefit state-run producers Oil and Natural Gas Corporation (ONGC) and Oil India, with royalty on onshore crude oil production lowered to 10% from 16.66%.

Royalty on offshore crude production has also been reduced to 8% from 9.09%, while the royalty rate on natural gas has been cut to 8% from 10% following the introduction of a new flat deduction formula.

In addition, producers may see further gains from GST-linked savings, which could improve project economics by another 18%.

Royalty cut could unlock upside for upstream PSUs

Brokerage firm CLSA, which maintains a 'High Conviction Outperform' rating on ONGC with a target price of ₹405, said the government's decision came as a surprise and could increase the fair value of ONGC by 7%-9% and Oil India by 9%-11%.

CLSA added that the move is significant as it may ease concerns around higher upstream taxation, including the possibility of a windfall tax similar to the one imposed in 2022.

According to the brokerage, such fears had weighed heavily on the performance of ONGC and Oil India, making them among the weakest-performing upstream energy stocks globally.

The brokerage also said that at Brent crude prices of $80 per barrel, ONGC could deliver a total return of over 50%, as the stock currently factors in Brent prices of nearly $65 per barrel.

ONGC shares ended Monday's session 0.45% higher at ₹280.45, while Oil India shares settled 0.20% higher at ₹455.10.