Synopsis: ONGC and Oil India shares came under pressure after the government unexpectedly raised the effective onshore crude royalty rate to 13.33% from the recently announced 10%, impacting earnings forecasts.
The government’s latest revision to crude oil royalty rates has sparked concerns among investors, coming just weeks after a previously announced reduction. The move partially reverses the expected benefits for domestic oil producers and has renewed focus on policy stability in the energy sector.
Although the revised royalty rate remains below historical levels, analysts believe the change could weigh on profitability and earnings estimates. However, most brokerages view the decision as a one-time fiscal adjustment aimed at safeguarding state government revenues rather than signaling a broader shift in energy policy.
Stock Performance
With a market capitalisation of Rs. 69,814 cr, the shares of Oil India Ltd were trading at Rs. 429.20 per share, up from its previous close of Rs. 427.45 per share.
With a market capitalisation of Rs. 3,16,771 cr, the shares of Oil and Natural Gas Corporation Ltd were trading at Rs. 251.80 per share, down from its previous close of Rs. 251.90 per share.
What’s the News
Shares of state-run upstream oil explorers Oil & Natural Gas Corporation Ltd (ONGC) and Oil India Ltd have experienced a notable sell-off. The primary trigger for this downward pressure is an unexpected policy shift by the government regarding royalty rates. Just a month after announcing a cut on May 8, the government decided to increase the effective royalty rate on onshore crude oil production to 13.33%.
While this new rate is technically lower than the historical 16.67% rate applicable in the past, it is higher than the recently promised 10% rate. Notably, the royalty rates for offshore oil and gas production remain unchanged, and the benefits of standardized ad valorem deductions (20% and 15% for nominated and other blocks) are still in place.
Impact on Earnings
Kotak Institutional Equities estimated that this royalty adjustment will generate between Rs. 2,300 crore to Rs. 2,500 crore in revenue for the government. From an earnings standpoint, Kotak projects a milder 1% to 1.5% negative impact on ONGC’s EPS, and a 5% to 6% hit on Oil India’s EPS.
Despite the disappointment surrounding the policy flip-flop, Kotak expressed confidence that long-term fiscal stability and economic equilibrium remain intact under amended Acts and PNG rules. Between the two state-run upstream explorers, Kotak maintains ONGC as its preferred pick.
Global brokerage firm CLSA noted that while this sudden policy reversal acts as an irritant that could cause investors to worry about future negative government interventions, they view it as a localized, one-off measure intended to protect state government revenues.
According to their calculations, the hike will hit the companies’ Earnings per Share (EPS) differently, potentially impacting ONGC’s EPS by 2% and hitting Oil India significantly harder with a 9% reduction.
Oil India Ltd (OIL) is a government-owned Maharatna company engaged in the exploration, development, and production of crude oil and natural gas. The company has a strong presence in India’s upstream energy sector, particularly in Assam and other northeastern states, while also expanding its footprint across domestic and international oil and gas assets.
Oil and Natural Gas Corporation Ltd (ONGC) is India’s largest crude oil and natural gas producer and a Maharatna public sector enterprise. The company operates across the entire upstream value chain, including exploration, drilling, production, and reservoir management, contributing a significant share of India’s domestic hydrocarbon output.
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