You can only apply DCF to the companies where you can forecast earnings with a certain degree of confidence and it’s very hard to do that for commodity stocks especially for oil companies. Simply Wall Street applies DCF and adjusts discounting factors based on the nature of the industry. It’s purely mathematical and doesn’t consider any sector or company specific dynamic.
When it comes to valuing commodity stock, I generally use my own metric which is average oil prices/average P/E in a particular year and compare that with historical trend. Based on that I find both ONGC and OIL to be quite expensive.
I work in oil and gas sector and have seen negative oil prices (during Covid) and some crazy up moves that can create extreme swings in earnings. Structurally, oil demand is forecast to remain flattish as per various estimates (IEA, OPEC) due to increasing EV penetration. I have also consulted with both OIL and ONGC and can tell you that they are not among the best managed companies and their operational metrics (e.g. cost/barrel, reserves replacement etc) badly lag the industry leaders.
So stocks like Oil or ONGC can be good short term trades as short term spikes in oil prices and current bull market are creating a demand for these counters.
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