Shares of Oil & Natural Gas Corp. jumped to the highest since February after Morgan Stanley upgraded the stock, citing a higher probability of recovery in average selling prices, improved outlook on domestic production and upside in refining associates post closures.

The global financial services provider upgraded ONGC stock to ‘overweight’ from ‘equal weight’ earlier, and raised its price target to Rs 115 apiece from Rs 84, according to its report. This is the first time since March 2016 that Morgan Stanley has turned ‘overweight’ on the government-owned company.

“Though we still do not expect the management’s guidance on volume to be achieved, we see a 4.3% volume growth CAGR over FY21-24 as reasonable,” Mayank Maheshwari, analyst at the research firm, said in the note. “The stock is implying a Brent oil price of $35 per barrel, making it one of the cheapest exploration & production plays globally.”

On Thursday, Brent Crude prices crossed $50 per barrel for the first time since March.

Morgan Stanley expects production from mature fields to remain stable and gas production from new fields in the KG-basin to contribute to the overall volume growth. “ONGC has won 24 blocks in the five rounds of Open Acreage Licencing Policy round. It has also invited expression of interest for production enhancement contracts in its existing mature fields, which should support volume growth over the longer term as well,” the note said.

The research firm also increased its oil realisation assumptions by 12% and its hydrocarbon production expectations to reflect better demand.

Bull Case For ONGC:

  • Price target of Rs 174 apiece

  • Net crude oil realisation of $52 per barrel

  • Long-term gas prices at $5.5 per million British thermal unit

  • New discoveries by ONGC or ONGC Videsh Ltd.

  • Operating costs declining beyond expectations

Bear Case For ONGC:

  • Price target of Rs 58 apiece

  • Net crude oil realisation of $42 per barrel

  • Long-term gas prices at $3.5 per mmbtu

Morgan Stanley anticipates ONGC’s earnings to grow at an annualised rate of 47% over FY21-23, with about 83% of those driven by upstream hydrocarbons and the rest by downstream associates.

Shares of ONGC gained as much as 9%—the most since April 30 —to Rs 99.85 apiece. The stock is the top gainer on the Nifty 50 index and is up for the third straight day.

Of the 33 analysts tracking ONGC, 22 have a ‘buy’ rating, five suggest a ‘hold’ and six recommend a ‘sell’. The stock has topped its 12-month Bloomberg consensus price target of Rs 96.96 apiece in Friday’s trade.

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