Oil And Gas Sector Check - Consumption Hitting Fresh Highs, Valuations Rich For Most Companies: Anand Rathi

Anand Rathi Report

After a highly volatile FY23, we expect brighter prospects in FY24/FY25. This should stem from modest crude and liquefied natural gas prices, more sourcing of discounted crude and greater domestic gas supplies. Indian refiners’ gross refining margins could come at premiums to the benchmark while possible lower petrol and diesel retail prices closer to the elections could lead to some downside.

With a consumption-thirsty nation, we see more volume growth across segments. FY24E earnings of the oil and gas companies we cover would come from good volumes and margins, and lower gas and input costs from the year prior.

In this report, we try to capture key trends in the oil and gas sector globally, and its impact on the Indian oil and gas sector.

Refining margins have fallen from their peak. Record margins were seen in 2022, tightening markets, heightening volatility and throwing up long-term challenges for refiners and consumers. This disrupted demand-supply patterns in 2022. Supply and demand uncertainties influencing refining margins would persist and the key to watch would be Russian sanctions on global supply, Chinese policy toward refined-product exports, the outlook on the global demand-supply growth gap and capacity increases (new refining projects).

Our picks

We are upbeat about the oil and gas sector, Indraprastha Gas Ltd., Gujarat Gas Ltd. and Bharat Petroleum Corporation Ltd. being our preferences. For most, though, we have a 'Hold' recommendation given the valuations and limited potential, while we have a 'Sell' on Hindustan Petroleum Corporation Ltd.

Risks

Some upward/downward risks to our assumptions remain, key being volatile crude prices, GRMs, marketing margins, sharper movement in LNG prices, change in government policies and faster electric vehicle adoption, affecting city gas distributions, etc.

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