BPCL, HPCL, IOC, ONGC, GAIL shares: Brent oil at $70 a barrel; here's how it will impact oil & gas sector

Brent oil futures have hit $70 a barrel mark, as OPEC has decided to proceed with a gradual rollback of the 2.2mbpd voluntary production cut that was in place since November 2023. The rollback will start from April 2025 up to September-December 2026. Emkay Global sees Brent prices falling to $60s a barrel level, even as it feels $70-75 a barrel could be a more probable range now against $75-80 a barrel earlier.

A sharply lower oil price, contrary to conventional wisdom, can be detrimental to the Indian oil & gas sector, affecting upstream realisations and gas economics versus oil, the brokerage said.

OMCs such as Hindustan Petroleum Corporation Ltd (HPCL), Bharat Petroleum Corporation Ltd (HPCL) and Indian Oil Corporation Ltd (IOC) would tend to gain, but price cuts and excise hike concerns will surface, coupled with heavy near-term inventory losses, Emkay Global said.

"User industries further downstream, like lubricants and airlines, will gain. $70 a barrel is still a comfortable level, with OMC auto fuel margin gains outstripping LPG losses (as seen in Q3FY25)," the brokerage said.

Emkay said upstream earnings would be impacted but ONGC and Oil India Ltd stocks have already corrected, and given a weaker rupee, standalone earnings cut should not be more than 6-9 per cent each. GAIL Ltd can also see a 5-6 per cent cut due to impact on petchem and US LNG marketing. The brokerage stayed constructive on OMCs, upstream, and GAIL -- in that order, with valuations being attractive currently.

"A $70/barrel oil brings OMCs back to the sweet spot with CP diesel/petrol gross marketing margins at Rs 8/12 per liter, which more than offsets Rs 250/cylinder of LPG under-recoveries, which can fall further with upcoming summer seasonality. Hence, OMCs can report strong earnings like Q3FY25. While Q4FY25 still seems weak, some LPG subsidy (we have assumed Rs 20,000 crore) can come given comments from the petroleum minister, secretary, and OMCs themselves, which along with any hike in LPG prices can be material triggers," Emkay Global said.

In the case of upstream companies, which are pegged at $75 a barrel net oil realisation, earnings may decline 6-9 per cent with NWG realizations also getting hit, but the resultant target prices for ONGC and Oil India is Rs 270 and 510, respectively. This provides 20-40 per cent upside for the stocks from the prevailing market price.

"Lower oil prices impact GAIL’s petchem business, where realizations are oil linked, and given that feedstock is gas with US LNG and spot, both being steady. Also, US LNG sold at oil-linked pricing in India would see spreads shrink as Henry Hub hovers at $4.4/mmBtu. However, GAIL’s valuations seem reasonable and the upcoming pipeline tariff hike is a key trigger," it said.