RIL, Oil India, ONGC shares: Brent crude below $70 level! Where are oil & gas stocks headed?

With the Brent crude futures falling below $70 a barrel mark for the first time since December 2021, 10 out of 10 BSE oil & gas index constituents settled lower on Wednesday, with the benchmark index emerging as the worst sectoral performer for the day with a 2.25 per cent slide. There are concerns globally over sustenance of oil prices after the oil cartel Opec-plus revised downward its demand forecast for 2024 and next year.

Oil India led the fall, tanking 4.51 per cent to Rs 581.70. ONGC declined 3.52 per cent to 285.25. Shares of oil marketing companies (OMCs) namely BPCL, HPCL and IOC fell 1.6-3.3 per cent. Indraprastha Gas Ltd, Petronet LNG Ltd, GAIL Ltd and Reliance Industries Ltd were other index losers, falling up to 1.9 per cent.

For upstream companies, the dip as of now is negligible in terms of earnings. If the low oil prices sustain for any length of time, upstream companies may see a downgrade of 3 per cent in standalone earnings, which may be exacerbated by a decline in their downstream subsidiaries as well -- NRL for Oil India, MRPL; and HPCL for ONGC, said ICICI Securities. The effective reduction in net realisations is only $2 per barrel, as of now, or less than 3 per cent against current estimates, the brokerage said

For RIL, savings made on input costs for its overall energy requirements do help offset gross refining margin (GRM) weakness, which seems likely in the current scenario, ICICI Securities said. 

"However, on balance, we do believe that OTC segment’s earnings will likely see a sharp dip from FY24. For the OMCs, while GRMs do see a downturn from FY24, the strong marketing margins help offset some of the pain, although absolute Ebitda still is likely to slip sharply against FY24’s record levels. Retail fuel price cuts can exacerbate the pain, but only if the extent of cuts exceed Rs 3–4 per litre due to the leeway present in overall marketing margins as of now," ICICI Securities said. 

In the case of gas companies, moderate LNG prices are seen offsetting the pain of slowing APM (administered pricing mechanism) allocation. Priority gas allocation has slipped from 85 per cent in early FY24 to less than 73 per cent now for the city gas distributors. 

"This creates pressure on gas costs as the minimum price to make up for $6.5 per mmBtu gas is $9.87 per mmBtu HPHT gas or $10–12 per mmBtu LNG. Therefore, margin sustenance will depend on pricing power, which is significant currently, staying at reasonably high levels of 35 per cent against petrol/diesel," ICICI Securities said.

Nuvama Institutional Equities said weak global oil demand, particularly from China, and a rise in non-OPEC production has led to a plunge in Brent prices. It believes ONGC’s earnings are severely vulnerable to cuts. "In contrast, only 18 per cent of Street has a bearish view, indicating excessive exuberance. We are cutting EPS by 5 per cent/6 per cent for FY25E/26E; reiterate ‘REDUCE’ with a target price of Rs 232," it said.

Swarnendu Bhushan, Co-head of Institutional Equities at PL Capital said the recent global developments have led to ample supplies amid weaker demand prospects. 

While upstream earnings are currently impacted, with the OPEC+ delaying its planned rise in production, Bhushan expects oil prices to rebound to $75-80 a barrel level in the near term. He expects net oil realisation should bounce back to $75 a barrel. 

"Additionally, APM price is set to rise in FY26E and gas produced from new wells would attract premium pricing. These bode well for upstream players. We upgrade our rating on ONGC from ‘Hold’ to ‘Accumulate’ with a target price of Rs329 based on 9 times FY26 adjusted EPS and adding the value of investments," Bhushan said. 

He also maintained ‘Buy’ on Oil India with a target price of Rs 786, based on 12 times FY26 adjusted EPS and adding the value of investments.  

In the case of Petronet LNG, InCred Equities said the global oversupply is set to drive LNG prices lower, presenting an opportunity for India, which relies heavily on imported LNG for its energy needs. With  India’s LNG demand expected to double over the next five years, primarily driven by the power, fertilizer, and city gas distribution (CGD) sectors, Petronet LNG is poised to benefit  significantly, it said.

"We upgrade our rating on the stock to  ADD (from HOLD) with a higher target price of Rs 519 (Rs 228 earlier). However, any delay in new liquefaction capacity addition and non-utilization of the Kochi terminal pose downside risks to our earnings estimates," it said today.

ICICI Securities said it continues to be positive on GAIL, Gujarat Gas, MGL and HPCL along with Oil India and ONGC, but acknowledges that 2–3 months of such low oil prices, coupled with any retail price cuts creates vulnerabilities for HPCL. 

HPCL, even with its dependence on marketing, may not see material EPS downgrades, as long as fuel price cuts remain in a reasonable range of Rs 2–3 per litre. ONGC and OIL India will likely see lower EPS estimates owing to softer net realisations, but effective reduction is only $2 per barrel as of now, or less than 3 per cent against current estimates. 

"For GAIL, Gujarat Gas and MGL, we do not see the present scenario as a threat to earnings in a meaningful way – even if liquid fuels do decline to a certain extent, 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)," it said.