Brokerage Motilal Oswal Financial Services has retained its ‘buy’ call on ONGC with a price target of Rs 198 per share, making it a top pick for the gas and oil sector in 2023.

In a morning update on January 2, the broker noted that 2023 could be a defining year for ONGC, with two notable triggers: an expected rise in domestic oil and gas production and a possible bottom in gas realisations.

Both could be good for ONGC, an outcome that has the brokerage naming the oil major a top pick for the sector in 2023.

The brokerage mentioned that while the delay in project execution hurt ONGC’s production, the floor price of domestic natural gas saved the company.

Domestic gas prices have been below $3.5/mmBtu, which may affect ONGC’s profitability as its gas production cost is $3/mmBtu.

Continued delays in project implementation have led to sluggish growth in oil production since 2005 and slow growth in natural gas production since 2019.

While ONGC’s Reserve Replacement Ratio (RRR), an indicator of sustainable production, has been consistently above 1x, oil production from its domestic fields (former joint ventures) has declined from a peak of 26.5mm in FY2005 to 19.5mm in FY2005 last fiscal year.

Likewise, gas production from domestic fields (former joint ventures) peaked at 24.7 billion cubic meters in FY19 and steadily declined to 20.6 billion cubic meters in FY22.

However, the long-awaited KG-DWN-98/2 is expected to reverse this trend from May 23, increasing peak oil production by 40-45 kbopd and gas production by 10-12 mmscmd (both in FY2025. At its peak, the field will boost ONGC’s domestic oil production by 10% and its current domestic gas production by 20%.

“With the increased visibility of positive results based on these two triggers, we reiterate our Buy rating on the stock. We recommend ONGC as the sector’s top pick for 2023. The standalone business is valued at 6x Dec’24E per share with a gain of Rs 28.2 and an investment value of Rs 27. We arrive at a target price of Rs 198, implying a potential upside of 35%,” the brokerage said.

However, it cited misallocation of capital, increased windfall tax or a sharp drop in oil prices and failure to implement the APM gas floor as key downside risks.

ONGC shares rose nearly 2% to Rs 149.65.