Active Stocks
Mon Sep 25 2023 13:10:39
  1. Tata Steel share price
  2. 127.8 0.87%
  1. NTPC share price
  2. 239.55 0.67%
  1. Wipro share price
  2. 414.9 -0.9%
  1. Tata Motors share price
  2. 622.7 0.26%
  1. ITC share price
  2. 442.95 -0.06%
Business News/ Markets / Stock Markets/  Oil and gas stocks rally; HPCL up 6%, BPCL surges over 3%; should you buy or sell?

Oil and gas stocks rallied on Wednesday with strong buying in oil marketing companies (OMCs) such as HPCL, BPCL, and Indian Oil Corporation (IOC). Gas producers like Gujarat Gas, Indraprastha Gas, and GAIL India. Heavyweight Reliance Industries (RIL) also picked up by nearly a percent. The sharp upside in oil stocks comes after brokerage Kotak Institutional Equities said OMCs' recent GRMs have been too good to believe.

It also needs to be noted that oil stocks are on a winning streak despite decline in crude oil futures today owing to low demand.

At the time of writing, BSE Oil & Gas traded at 18,077.81, up by 235.34 points or 1.32%. Meanwhile, Nifty Oil & Gas traded at 7,472.80 up by 1.09%.

On the index, HPCL emerged as the top gainer, surging by 5.5% to 276.60 apiece on BSE. BPCL rallied by 3.34% to 368 apiece, Indian Oil at 90.99 apiece up by 1.84%.

IGL's share price gained by 1.3% to 468.50 apiece, while Gujarat Gas jumped by 1.12% to 484.35 apiece. Heavyweight RIL climbed 0.8% to 2,499, while GAIL is up by 0.5% to 105.20 apiece. Adani Total Gas also advanced marginally to 680.70 apiece.

However, ONGC was also gradually up to 153.85. Also, Petronet LNG was broadly flat to 223.55 apiece.

In their research note, Kotal Institutional Equities on Wednesday said, "Indian oil marketing companies (OMCs) reported GRMs in recent quarters have perplexed us. Among the OMCs, surprise has been more from BPCL and IOCL. HPCL’s refining performance has been relatively muted yet strong, likely as both its Mumbai and Vizag refineries have had expansion/upgradation going on for the past few years."

During the fiscal year FY23, Indian Oil posted a GRM of $19.5 per barrel, while BPCL recorded a GRM of $20.2 per barrel --- which is nearly 2 times of SG complex margin of $10.8 per barrel.

Compared to earlier significant discounts to SG complex benchmark, the brokerage's note added, "OMCs have been reporting rising premiums in recent years."

Notably, in the past two years, as per Kotak's report, part of the superior performance versus the Singapore complex margins can be justified by much stronger middle-distillate cracks (Indian refiners have a higher share) and weaker cracks for products such as FO (higher share in SG complex).

It said, "But OMCs’ reported GRM have been higher versus Kotak India refining benchmark that we use based on India’s overall refined production slate."

Further, Kotak's note added, "the reported GRMs have been much better versus other large independent refiners such as RIL, Chennai Petroleum or MRPL. In recent quarters, the gap with other refiners has increased as OMCs (surprisingly

in our view) have not reported the GRM after the impact of windfall export taxes on retail fuels (diesel/petrol/ATF) that was implemented from July 1, 2022. In 4QFY23, with reduction in export taxes, the impact on independent refiners had reduced. Yet, OMCs’ gap with reported margins by these refiners has remained high."

It needs to be noted that generally, OMCs consider refining and marketing as one segment. However, earlier this was not the case as OMCs disclosed EBITDA break-up and the impact of adventitious gains/losses for both refining/marketing and also detailed price build-up of retail fuels.

According to Kotak, recently, such disclosures have been reduced. This makes analysis difficult. However, based on reported GRMs, the implied marketing margins seem much weaker despite benefits in marketing due to export tax and over-recoveries, especially in 4QFY23.

In Kotak's view, if OMCs can sustain such strong refining performance (versus benchmarks and other refiners) when marketing margins normalize (pricing freedom back), there will be a case for OMCs to re-rate.

Among oil PSUs, the brokerage prefers upstream stocks over OMCs. It said, "In our view, capping of upstream realization (while not ideal) ensures better earnings visibility when compared to downstream OMCs (no pricing freedom on retail prices currently). Maintain REDUCE on BPCL/IOCL and SELL on HPCL."

Kotak has set a target price of 355 apiece on BPCL, at 235 apiece on HPCL, and 85 apiece on Indian Oil.

"Exciting news! Mint is now on WhatsApp Channels 🚀 Subscribe today by clicking the link and stay updated with the latest financial insights!" Click here!

Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.
More Less
Updated: 07 Jun 2023, 03:22 PM IST
Next Story
Recommended For You

Get the best recommendations on Stocks, Mutual Funds and more based on your Risk profile!

Let’s get started
Switch to the Mint app for fast and personalized news - Get App