3 Major Oil & Gas Sector Stocks Gets 'Buy' Call For Up To 45% Gains, Suggested By Sharekhan

Sharekhan, a leading brokerage firm, in its Q1FY23 result preview report published on 11th July 2022 has given a 'buy' rating to major oil & gas sector stocks. Among its buy call, the brokerage has 3 preferred picks which include Reliance Industries Ltd, GAIL (India) Ltd, and Gujarat State Petronet Ltd (GSPL) for up to 45% potential upside.

Sharekhan View on the Oil & Gas Sector Stocks

Commenting on Oil & Gas sector major stocks, Sharekah said, "We expect upstream PSUs to report blockbuster quarter led by a steep increase in oil price to $113/bbl (up $13/bbl q-o-q) and 110% hike in the domestic gas price to $6.1/mmBtu for H1FY23E. Thus, higher oil & gas realisation would drive a robust 267%/243% y-o-y growth in PAT of ONGC/Oil India in Q1FY23E. However, OMCs (IOCL, BPCL, and HPCL) are expected to report massive losses as negative petrol/diesel marketing margin, forex loss and LPG under-recovery would offset benefit of super high refining margin of ~$22/bbl and inventory gains (although partially offset by negative impact of excise duty cut on petrol and diesel by the government). CGD players (MGL/IGL) to witness q-o-q earnings recovery on improvement in per unit EBITDA margin (benefit of price hikes + a decline in spot LNG price) and better volumes for CNG/D- PNG. However, weak industrial PNG demand and pass-through of lower spot LNG price would affect Gujarat Gas's earnings. We expect Reliance Industries Limited's (RIL) consolidated PAT to grow sharply by 48% q-o-q primarily led by robust earnings from refining segment and higher domestic gas price of $9.9/mmBtu for deep water blocks."

Upstream PSUs - Super strong earnings driven by high oil & gas realisations

Sharekhan said, "We expect upstream PSUs to have a stellar earnings performance in Q1FY2023, primarily led by a steep ~$13/bbl q-o-q rise in international crude oil prices and benefit of an 110% increase in domestic gas price to $6.1 mmBtu. We expect decent oil & gas production volume growth of 1-2% y-o-y for ONGC/Oil India and net oil realisation of $110-111/bbl in Q1FY2023 and thus expect robust 80%/7% q-o-q growth in PAT of ONGC/Oil India. Strong y-o-y earnings growth of 267%/243% for ONGC/Oil India is on account of low base of last year, given weak oil & gas prices."

OMCs - Likely to incur losses as negative auto fuel marketing margin to offset high GRM and inventory gain.

Sharekhan said, "We expect OMCs to report massive net loss due to large negative marketing margin of Rs. 15/Rs.11 per litre on diesel/petrol, forex loss and LPG under-recoveries. Weak marketing performance would offset the benefit of super-normal GRM and inventory gain given rally in crude oil price. Benchmark Singapore complex GRM rallied sharply to ~$21.5/bbl versus $7.9/bbl in Q4FY22 led by elevated petrol/diesel crack spread of $39-40/$24-25 per bbl in Q1FY23. For RIL, we expect PAT to increase by 48% q-o-q primarily led by robust earnings from refining segment (high GRM) and higher domestic gas price of $9.9/mmBtu for deep-water blocks."

CGDs and gas utilities - Margin/volume to improve q-o-q for CGDs; Steady quarter for gas utilities

Sharekhan said, "We expect earnings of IGL/MGL to improve sequentially, as price hike and moderation in spot LNG price to $27/mmBtu in Q1FY23 (versus $30.4/mmBtu in Q4FY22) bodes well for margin improvement. IGL/MGL would also witness a q-o-q increase in volume led by better CNG/ domestic PNG demand. However, we expect Gujarat Gas to report earnings decline on both y-o-y/q-o-q given pressure on the industrial PNG volume and margin moderation on account of pass- through of a fall in spot LNG price to customers. Among gas utilities, GAIL is expected to report a 9% q-o-q decline in PAT led by lower profitability from gas marketing (lower spot LNG price) and LPG-LHC business (higher domestic gas price) while gas transmission segment to witness improvement on volume recovery. Petronet LNG would witness 10-11% q-o-q volume growth but the same would be offset by a decline in trading margin and forex loss. GSPL is expected to report slight improvement in earnings with marginal uptick in volume."

Sharekhan's Preferred Picks Oil & Gas Stocks

Oil & Gas Stocks	CMP	Target Price	Potential Upside	1-Year Returns
RIL	Rs 2,396	Rs 3,050	27.30%	14.85
GAIL	Rs 140.05	Rs 175	24.96%	-3.08
GSPL	Rs 226.70	Rs 328	44.68%	-29.28

Other recommendation by Sharekhan with buy call includes ONGC, MGL, Gujarat Gas, IOCL, BPCL, & HPCL. Brokerage maintains Hold rating to Oil India.

Valuations & Key Risks

According to the brokerage, "The Recent imposition of fixed cess rate has created earnings uncertainty and valuation concern for upstream PSUs and lack of policy clarity would remain a key overhang and keep stock performance of ONGC/Oil India volatile until the above windfall taxes are removed/rationalised. On the other hand, refining margin super cycle bode well for downstream players (like RIL) as it would help to absorb export duty on petrol/diesel/ATF. A likely sharp fall in the international oil price would be crucial for normalization of marketing margin and could improve investor sentiments towards OMCs."

The brokerage added, said, "We prefer RIL among downstream players given a cyclical GRM recovery and a likely further value unlocking in digital and retail businesses would add to shareholders' returns in the coming years. We prefer GAIL and GSPL among gas utilities, as they are a play on rising domestic gas demand and are available at attractive valuations."

According to the brokerage the key risks to their buy call would be 1) Lower-than-expected gas sales volumes amid demand slowdown given high gas prices, 2) Sustained margin pressure on CGDs in case of high gas price, and 3) Lower refining margins.

Disclaimer

The stocks have been picked from the Sharekhan's Q1FY2023 Result Preview Report. Greynium Information Technologies, the Author, and the respective Brokerage House are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to check with certified experts before taking any investment decision.