Amid exorbitant Oil & Gas prices, who got the rewards and who got burnt?

Amid exorbitant Oil & Gas prices

by 5paisa Research Team Last Updated: 2022-04-07T23:16:20+05:30

The Ukraine-Russia war crisis has taken a major toll on the Oil & Gas Sector. The oil prices inflated to all time highs in such uncertainties, leaving investors even more cautious. Indian market has also felt the burn from this outcome. While the upstream PSUs enjoyed the rally, parallelly, the OMCs fought for their margins. 

Upstream companies are the ones that explore and produce the crude oil while the downstream companies, such as the OMCs, buy the oil from the middle-man who refine it into usable forms and sell it to the retailers. 

The upstream PSUs are expected to sustain their strong earnings growth momentum, supported by the steep increase in oil price to $99/bbl (up 25% q-o-q), thus boosting the PAT of ONGC and Oil India by 116% and 55% y-o-y in Q4FY2022, respectively. On the volume performance note, ONGC likely to produce lower oil and gas, while Oil India is expected to report decent production growth.


Oil India is preferred among other upstream PSUs as it is both improving on oil and gas realisation and recovery in refining margin as it holds 70% stake in Numaligarh Refinery.

Coming to earnings of OMCs, they are expected (IOCL, BPCL, and HPCL) to decline sharply on both y-o-y and q-o-q basis due to weak marketing margin auto fuels. There has been no petrol or diesel price hike in Q4FY2022 amid several state elections. This would result in negative marketing EBITDA, which would offset the benefit of strong GRM as Singapore complex GRM rose 30% q-o-q to $7.9/bbl which was due to higher petroleum product cracks. Overall, the OMS are expected to report a decline in PAT on a y-o-y basis in Q4FY22.
 

OMCs

Expected Decline in PAT y-o-y basis

IOCL

53%

BPCL

56%

HPCL

79%

 

However, RIL remains an exception. The PAT is expected to increase by 43% and 8% y-o-y and q-o-q to Rs. 16,963 crores, led by 

1) strong growth in standalone, driven by higher GRM
2) benefit of higher ARPU for Jio 
3) sustained strong growth in retail EBITDA driven by higher footfalls
Thus, it is a preferred choice over the rest as for its given cyclical GRM recovery and likely further value unlocking in digital and retail businesses which would add to shareholders’ returns in the coming years

The expected earnings of City Gas Distributors, such as IGL, MGL, and Gujarat Gas, to improve with an expected price hike to help margin recovery. However, volume is expected to largely remain stable but increase sharply for IGL and MGL by 13% and 14.5% y-o-y, respectively.

Even with price hike and large volumes, the q-o-q earnings remain below Q4FY21 levels and y-o-y earnings also remain weak, all due to high cost of gas and lower allocation of APM gas. Among gas utilities lot, GAIL is expected to report robust 74% y-o-y PAT growth, led by sharp rise in profitability of gas marketing segment because of higher spot LNG prices and higher realization in LPG-LHC business.

GSPL is expected to report largely stable earnings, and volume is likely to remain flat. Thus, GAIL and GSPL are preferred among others in this category, as they are profited from on-rising domestic gas demand and are available at attractive valuations.

The risks involved with investments in these: 

1) Lower-than-expected gas sales volume amid demand slowdown and delay in the development of new GAs
2) Sustained margin pressure on CGDs in case of high gas price 
3) Sharp decline in crude oil price
4) Lower refining margin

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