 |
|
The recent decline in Brent crude prices below the $70 mark has sent shockwaves through the oil and gas sector, resulting in significant losses for Indian companies. On Wednesday, all 10 constituents of the BSE oil & gas index closed in the red, with the benchmark index experiencing a steep 2.25 percent slide. This downturn can be attributed to growing global concerns about the sustainability of oil prices following OPEC+’s downward revision of its demand forecast for 2024 and beyond.
Oil India bore the brunt of the fall, plummeting by 4.51 percent to Rs 581.70, while ONGC suffered a 3.52 percent decline to Rs 285.25. Oil marketing companies (OMCs) also experienced significant losses, with BPCL, HPCL, and IOC falling between 1.6 and 3.3 percent. Other index losers included Indraprastha Gas Ltd, Petronet LNG Ltd, GAIL Ltd, and Reliance Industries Ltd, all experiencing drops of up to 1.9 percent.
While the immediate impact on upstream companies in terms of earnings is minimal, analysts warn that a sustained period of low oil prices could lead to a 3 percent downgrade in standalone earnings. This impact could be exacerbated by declines in their downstream subsidiaries, such as NRL for Oil India, MRPL for Oil India, and HPCL for ONGC, according to ICICI Securities. The brokerage also noted that the effective reduction in net realisations is currently a modest $2 per barrel, representing less than 3 percent of current estimates.
For Reliance Industries (RIL), savings on input costs for its overall energy requirements are expected to offset the potential weakness in gross refining margin (GRM) in the current scenario. However, ICICI Securities anticipates a sharp decline in the earnings of RIL’s over-the-counter (OTC) segment starting in FY24. While OMCs may experience a downturn in GRMs from FY24, their strong marketing margins are expected to mitigate some of the impact. Nevertheless, overall earnings before interest, taxes, depreciation, and amortization (EBITDA) are likely to fall significantly compared to the record levels achieved in FY24. Retail fuel price cuts could exacerbate the situation, but only if the extent of the cuts surpasses Rs 3–4 per litre, considering the current leeway in overall marketing margins.
In the case of gas companies, moderate LNG prices are expected to partially offset the impact of slowing APM (administered pricing mechanism) allocation. Priority gas allocation has declined from 85 percent in the early stages of FY24 to less than 73 percent currently for city gas distributors. This shift creates pressure on gas costs, as the minimum price to cover $6.5 per mmBtu gas is $9.87 per mmBtu HPHT gas or $10–12 per mmBtu LNG. Consequently, margin sustainability will hinge on the ability to maintain pricing power, which is currently substantial, hovering around 35 percent against petrol/diesel prices.
Nuvama Institutional Equities attributed the plunge in Brent prices to weak global oil demand, particularly from China, coupled with an increase in non-OPEC production. The firm believes ONGC’s earnings are highly vulnerable to cuts and that current market exuberance is unwarranted, prompting them to cut their EPS estimates by 5 percent/6 percent for FY25E/26E. They maintain a ‘REDUCE’ rating with a target price of Rs 232.
Swarnendu Bhushan, Co-head of Institutional Equities at PL Capital, attributed the recent developments to ample supplies amidst weakening demand prospects. While acknowledging the current impact on upstream earnings, Bhushan expects oil prices to rebound to $75-80 a barrel in the near term due to OPEC+’s delay in planned production increases. He anticipates net oil realisations to bounce back to $75 a barrel. Bhushan expects APM prices to rise in FY26E, and gas produced from new wells to attract premium pricing, benefiting upstream players. He upgraded his rating on ONGC from ‘Hold’ to ‘Accumulate’ with a target price of Rs 329 based on 9 times FY26 adjusted EPS and the value of investments. He also maintained a ‘Buy’ rating on Oil India with a target price of Rs 786, based on 12 times FY26 adjusted EPS and the value of investments.
InCred Equities highlighted the global oversupply situation as a driver of lower LNG prices, creating an opportunity for India, heavily reliant on imported LNG. With India’s LNG demand projected to double over the next five years, driven by the power, fertilizer, and city gas distribution (CGD) sectors, Petronet LNG is poised to benefit significantly. InCred Equities upgraded its rating on Petronet LNG to ADD (from HOLD) with a higher target price of Rs 519 (Rs 228 earlier). However, they cautioned that delays in new liquefaction capacity additions and non-utilization of the Kochi terminal could pose downside risks to their earnings estimates.
ICICI Securities expressed continued optimism about GAIL, Gujarat Gas, MGL, and HPCL, alongside Oil India and ONGC. However, they acknowledged the vulnerabilities for HPCL if low oil prices persist for 2–3 months coupled with retail price cuts. Even with its dependence on marketing, HPCL may not experience significant EPS downgrades as long as fuel price cuts remain in a reasonable range of Rs 2–3 per litre. ONGC and OIL India are expected to see lower EPS estimates due to softer net realisations, but the effective reduction currently stands at only $2 per barrel, less than 3 percent of current estimates. For GAIL, Gujarat Gas, and MGL, ICICI Securities does not foresee a significant threat to earnings, even if liquid fuels experience a decline. The moderation in spot LNG prices and the reduction in term LNG prices (every USD 5/bbl reduction in benchmark crude price reduces term LNG price by USD 0.6/MMBtu or INR 1.6/scm) are expected to mitigate any potential negative impacts.
Source: RIL, Oil India, ONGC shares: Brent crude below $70 level! Where are oil & gas stocks headed?