Rising domestic gas supply and improvement in oil and gas realisation should drive upstream companies' earnings growth and valuations. We estimate APM gas price to be revised upwards by over 60% to ~USD 3/mmbtu in H2FY22, and further by over 45% to >USD 4/mmbtu in H1FY23.

We believe Brent crude price, currently at >USD 75/bbl, should remain elevated, as OPEC supply growth is likely to lag global demand growth. We estimate 3% CAGR oil & gas production growth and 28% CAGR improvement in realisation for ONGC and OIL over FY21-23E should drive earnings growth of up to 30-45% CAGR (FY21-FY23E). Further, it should lead to stock price upside potential of over 26-36% for ONGC and OIL. On FY23E, ONGC is trading at a PER of 3.8 and OIL is trading at 3.1 PER.

Oil price to remain elevated over the medium term: Brent crude price is currently at >USD 75/bbl, up 47% YTD, driven by recovery in global demand with opening up of economies. The US was hit by Hurricane Ida in Jul end, which has resulted in disruption of production from Gulf of Mexico (GoM) of ~1.7mb/d in Aug. The IEA expects supply from GoM to normalise by Q4CY22. With crude oil and product inventory in lower half of the five-year range and EIA estimating global crude oil supply growth to lag demand growth in 2021 as economy global recovery continues to gather pace, we see an upside risk to crude oil prices.

Domestic gas prices to witness a sharp jump: We estimate the domestic APM gas price to be revised upwards by over 60% to ~USD 3/mmbtu in H2FY22, and further by over 45% to >USD 4/mmbtu in H1FY23 from current price of USD 1.79/mmbtu. The APM gas price, which is currently at a decadal low, should rise sharply, supported by firming up of global gas prices post unlocking of economies and the current shortage of supply in Europe ahead of the winter season.

Improving realisation to benefit upstream companies: We expect, in FY23E, ONGC (standalone) to produce 23.0 mmt of oil and 24.8 bcm of gas, and OIL to produce 3.2 mmt of oil and 2.6 bcm of gas. Increasing gas prices and rising Brent crude oil price should improve realisation and in turn drive earnings CAGR of 30-54% over FY21-FY23E for ONGC and OIL. ONGC should also benefit from increase in gas production by up to 12mmscmd over FY21-25E as production from its KG basin blocks. Every USD10/bbl change in oil price realisation changes ONGC's FY23E earnings by INR 7.2/share (19.5%) and OIL's FY23E earnings by INR 8.0/share (11.3%). Every USD1/mmbtu change in gas price realisation changes ONGC's FY23E earnings by INR 4.5/share (12.3%) and OIL's FY23E earnings by INR 7.8/share (11.0%). We raise our earnings estimate for FY22E and FY23E by upto 21% for ONGC and OIL on higher oil and gas realisation.