Synopsis : ONGC shares rallied sharply after the government announced a reduction in royalty rates on crude oil and natural gas production. The move is expected to improve profitability for upstream energy companies and encourage higher domestic exploration activity.
Oil and Natural Gas Corporation (ONGC) shares surged 6.5% on Tuesday after the government reduced royalty rates on crude oil and natural gas production across multiple categories, including deepwater and ultra-deepwater fields.
The policy change is expected to benefit upstream oil producers such as ONGC and Oil India by lowering production-related costs and improving overall profitability.
Following the announcement, ONGC share price opened at Rs 288.50 on the BSE and climbed to an intraday high of Rs 298.95. The stock also touched an intraday low of Rs 286.70 before witnessing strong buying interest throughout the session.
Under the revised framework, royalty on onshore crude oil production has been reduced from 16.66% to 10%. Offshore crude royalty rates have also been cut from 9.09% to 8%.
Meanwhile, royalty on natural gas production has been lowered from 10% to 8% through a newly introduced flat deduction mechanism.
Royalty refers to the payment oil and gas companies make to the government for extracting crude oil and natural gas from national reserves. Since royalty is charged as a percentage of the market value of production, lower royalty rates directly improve margins for upstream companies.
The government's decision is being viewed as a major positive for the sector, especially at a time when exploration costs remain elevated globally. Lower royalty rates are expected to make domestic drilling and deepwater exploration projects more financially viable.
Brokerage firm CLSA reportedly maintained its as High Conviction Outperform's rating on ONGC with a target price of Rs 405 after the announcement. According to estimates cited in market reports, the royalty cut could increase ONGC's fair valuation by nearly 7% to 9%.
The brokerage also noted that the move reduces concerns surrounding possible upstream taxation risks, including the return of windfall taxes similar to those introduced in 2022.
Analysts believe the royalty reduction could significantly improve earnings visibility for upstream energy firms, particularly if global crude oil prices remain elevated.
At current levels, ONGC is also expected to benefit from stronger crude price realisations. Market experts noted that the stock had earlier been pricing in much lower crude assumptions, making the latest policy change an additional positive trigger.
Technical analysts also turned bullish on the stock after the sharp rally. According to market experts, ONGC successfully defended support levels near its 50-day exponential moving average around Rs 280 before witnessing a strong breakout.
Analysts believe the stock could retest recent highs near Rs 307, while sustained momentum may push prices towards the Rs 320 zone in the near term.
On the downside, the Rs 285 to Rs 280 range is expected to act as immediate support following the gap-up rally.
The sharp move in ONGC also lifted sentiment across the broader oil and gas sector, with investors viewing the government's decision as a supportive policy step for India's domestic energy industry.
Disclaimer : This article is for informational and educational purposes only and should not be considered financial or investment advice. Investors should consult certified financial advisors before making investment decisions.
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