ONGC rallies on royalty cut: CLSA sees 50% return

Stocks jump in a weak market

Shares of state-owned upstream companies Oil and Natural Gas Corporation (ONGC) and Oil India rallied sharply in Tuesday’s intraday trade even as the broader market remained weak. On the BSE, Oil India rose as much as 7% to ₹490.85, while ONGC climbed up to 5% to ₹295.45 during the session. Around 09:54 AM, both ONGC and Oil India were trading about 5% higher. The move put the spotlight back on upstream oil and gas producers, which are sensitive to both global crude prices and domestic fiscal terms. The day’s rally was linked to a policy announcement made a day earlier by the petroleum ministry.

What triggered the rally

The surge in ONGC and Oil India was triggered after Union Minister of Petroleum and Natural Gas Hardeep Singh Puri announced a rationalisation of royalty for India’s upstream sector. According to reports cited in the market coverage, the Centre reduced royalty rates on crude oil and natural gas production across several categories of fields, including deepwater and ultra-deepwater blocks. The stated objective was to support domestic exploration and production and to reduce inconsistencies across different regimes. Investors typically track such changes closely because royalty is a direct levy on output and affects operating margins. The market reaction suggested traders were quickly repricing near-term cash flows for upstream producers.

Government’s stated rationale and the legal framework

In a social media post, Puri said the rationalisation of royalty under the ORD Act marks a new era for India’s oil and gas regimes by eliminating inconsistencies and driving growth in the upstream sector. He added that this decision would be a major step toward regulatory clarity. The post also referenced the 2025 amendments to the ORD Act and PNG Rules, under which royalty rates and methodologies were updated for crude oil, natural gas, and casing head condensate. Royalty, as described in the coverage, is a levy under The Petroleum and Natural Gas Rules, 1959 and is payable to the state or central government granting the lease, with the Central Government as the lessor in offshore areas. The government’s intent, as communicated, was to create a stable, predictable and investor-aligned framework.

Key royalty changes highlighted in reports

The most detailed set of changes in the coverage focused on nominated onshore blocks and pre-NELP production sharing contracts, which are relevant for national oil companies. The onshore crude oil royalty rate for these categories was reported to have been cut from 20% to 12.5% on an ad valorem basis calculated on the well-head price, a reduction of 7.5 percentage points. For natural gas, the NWG royalty rate was reduced from 10% to 9%. But the effective burden was described as dropping further to about 8% due to a revised well-head price calculation methodology that applies fixed deductions instead of actual post-well-head costs. Those deductions were cited as 20% of sale price for the nomination regime and 15% for others.

Incentives for offshore and frontier areas

Beyond legacy onshore fields, the government also introduced targeted incentives for geographies that typically carry higher technical and cost risks. Shallow-water offshore fields were described as typically attracting a 10% royalty rate. Deep-water and ultra-deep-water blocks were given the most generous terms, with reports indicating zero royalty for the first seven years under many HELP and DSF block structures. After that initial period, royalty was described as reverting to 5% and 2% thereafter for the relevant categories. These structures are aimed at improving project economics where development timelines are long and costs are high.

What CLSA said about ONGC and Oil India

Brokerage CLSA described the move as a surprise and said it could add fair value of about 7% to 9% for ONGC and about 9% to 11% for Oil India. CLSA also flagged that the change should reduce fears of an increase in upstream taxation through a 2022-like windfall tax, a concern that had weighed on investor sentiment. With oil at $10 per barrel, CLSA projected an over 50% total return on ONGC, noting that the stock was pricing in $15 per barrel Brent. CLSA maintained a “high conviction outperform” stance on ONGC and set a target price of ₹405 per share.

Market snapshot: prices, moves, and valuations

The intraday gains were also reflected in early session data points cited from the BSE. At 9:40 am on Tuesday, ONGC was reported to be trading 3.81% higher at ₹291.65 per share, with a market capitalisation of ₹3,66,903.84 crore. Oil India was reported to be up 5.86% at ₹483.3 per share, with a market capitalisation of ₹78,613.95 crore. Separately, coverage of the ministry notification said the announcement triggered an immediate positive reaction on May 12, with Oil India up about 7% and ONGC up over 4% and among the top Nifty gainers during the session. Vedanta was also mentioned as being in focus due to its onshore operations through Cairn Oil and Gas.

Why royalties matter to upstream cash flows

Royalty is linked to production and is paid regardless of profitability, so a lower royalty rate directly reduces the fiscal outgo per barrel or per unit of gas produced. Analysts and market participants often treat such changes as structurally supportive because they can improve operating margins and free cash flow without requiring additional capital expenditure. The coverage also quoted market commentary that lower royalty payouts improve operating margins, free cash flow, and project viability for upstream companies. For ONGC and Oil India, the benefit is particularly relevant because they are dominant operators of nominated and pre-NELP onshore blocks, where the reported cut from 20% to 12.5% applies. The changes also aim to bring uniformity across contractual and policy regimes, reducing the complexity of comparing economics across blocks.

Crude prices and upstream stock sensitivity

Separately from the policy change, the broader context in the coverage highlighted how upstream stocks tend to move with crude oil. Reports also referred to earlier sessions where shares of ONGC and Oil India rose as crude prices moved sharply, including instances where Brent crude futures rose and where crude reportedly touched levels such as $15 per barrel after being lower earlier in the day. Another cited data point showed Brent futures at $17.77 per barrel for an April contract in one session, coinciding with gains in upstream counters. The common link across these episodes is that higher crude prices can lift upstream realisations, while fiscal terms such as royalty influence how much of that uplift converts into cash flows.

Conclusion

ONGC and Oil India’s rally was driven by the government’s decision to rationalise and reduce royalty rates for crude oil and natural gas, a change that the market views as supportive for upstream economics. CLSA estimated a meaningful uplift to fair value for both companies and reiterated a ₹405 target price for ONGC, alongside a view of over 50% total return at $10 per barrel oil given its $15 per barrel implied pricing. The next key monitorables for investors will be the detailed implementation of the revised schedules across regimes and how companies reflect the new royalty methodology in their cash flow expectations.