Why Is The Price of ONGC Falling?

Let me start with a disclaimer, I have ONGC stocks and my family members do too. I recently purchased ONGC after selling my shares in NHPC. Anyway, at the current price, I have around 10% notional loss on ONGC, and the current price is right above 100rs a share in NSE.

Indian Government owns this company. You probably knew this. As of today, the Indian government owns more than 62% of this. It has subsidiaries like HPCL, MRPl, ONGC Videsh and Pawan Hans ( which does not matter). MRPL or HPCL does not generate a good ROE or ROCE, although they are supposed to diversify ONGC’s portfolio and reduce risk when the crude price goes down.

So, Why Is The Price of ONGC Falling?

Crude price is falling because of Corona Virus risk, which is causing disruption in China, which means less demand from China and that translated into lower Crude Price. Being an E&P company, ONGC stock price is tumbling.

ONGC Is still paying off the huge debt it took to buy HPCL and instead of putting back cash in their original business, being a government company they are just doing what they are being told.

Thirdly, the Government has a plan to divest a huge portion of their ownership and that means more supply of shares. Following the basic rule, more supply means lower prices.

Why Should We Consider Buying ONGC?

ONGC is India’s largest E&P company. India impost 80% of crude it needs and whatever India produces domestically, ONGC controls 80% of it. If you think the Internal combustion Engine will be replaced by electric vehicles soon, then please note that nobody in the industry believes that electric vehicles are not coming anytime sooner than 2040. And ONGC is moving from crude towards gas too. Although, the government can control those prices and cap the potential profits.

But let me give you 2 reasons to invest in this company right now. It is offering a huge 5% + dividend yield and the debt it has at this moment can be paid off with 3 years worth free cash flow. That means it generates a massive amount of free cash flow. And currently, the dividend payout ratio is way less than 50%. So they can boost dividends in the future.

If the Indian government continues selling the silver spoons or whatever they refer to these companies, then soon the company will out of government control. And consider the amount of energy India would need. ONGC Videsh can get listed. Crude prices may go up. So, there are a lot of upsides.

The risks I see is crude price falling and staying lower for longer and the government selling a lot of shares.

I am not asking you to buy or sell the stock, but I wanted to make my case for the company.