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Markets have been unforgiving this month, with the benchmark Nifty50 index down almost 10%. But Oil and Natural Gas Corp. Ltd (ONGC) has held up far better, slipping just 3.5%.

When crude oil prices rise amid geopolitical tensions, upstream companies are usually the first beneficiaries. ONGC, as India’s largest government-owned producer of oil and gas, naturally sits on the right side of that trade.

Higher crude, now around $100 a barrel, improves realisations and cushions near term earnings visibility. For every $5 per barrel increase in Brent crude price above $70 per barrel, ONGC’s standalone annual earnings per share (EPS) rise by about 14%, according to HDFC Securities. A weaker rupee also helps realizations.

But as is typical with domestic PSUs, there is a catch. Regulatory caps on the price of natural gas produced at legacy fields, and the possibility of a fresh windfall tax, are leading investors to discount any supernormal profits likely from rising crude.

Windfall tax includes special additional excise duties (SAED) intermittently imposed by the government on higher profits earned from rising domestic crude prices. That is primarily why ONGC shares have not rallied like their global peers since February-end when the ongoing West Asia conflict began.

Of course, some don’t expect any new windfall tax. For instance, CLSA has raised ONGC stock’s target price to ₹415 apiece, almost 60% higher than current levels. The broking firm believes that the stock is still pricing in crude at $63 a barrel, not the current $100. Its target price is based on crude sustaining at $89 in 2027, and dropping to $82 in 2028. If the war ends over the next few weeks, these assumptions may fail to hold. This uncertainty is also weighing on investor sentiment.

Sustained outperformance will require something more structural: production growth. That has historically been ONGC’s Achilles’ heel. For several years now, its ageing assets, such as Mumbai High, have been witnessing declining output. Production in the first nine months of FY26 remained largely flat year-on-year at about 30.6 mtoe (million tonnes of oil equivalent).

ONGC is working on fixing this. Its technical partnership with BP, signed in early 2025, can potentially raise production by as much as 60% over the next decade.

The December quarter (Q3FY26) already saw the production decline arrested. Meanwhile, new gas fields can raise output, as well as blended realizations, even as gas prices increase amid attacks on Qatar’s production facilities. Revenue from new well gas fields accounted for 18% of ONGC’s Q3FY26 revenue, and is expected to cross 35% over the next three to four years, as per an ICICI Securities report.

ONGC has lined up over ₹77,000 crore of development and infrastructure projects to support output expansion over the coming years. ICICI Securities expects projects in the KG basin, Daman offshore, and DSF-II blocks to support an output CAGR of around 5% between FY26 and FY28.

While high capacity utilisation at subsidiaries paves the way for increased exploration activities, which are positive over the long term, it can weigh on near-term earnings amid higher dry well write-offs.

The stock trades at 7.7 times FY27 estimated earnings, based on Bloomberg consensus. Execution risk remains a key monitorable. Investors are watching whether these plans translate into actual barrels on the ground. Once they do, the generous dividend payer could finally move on from being a valuation story.

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