Home / Markets / Stock Markets /  These oil and gas stocks are hot pick as crude burns

Crude oil prices dropped nearly 4% on Thursday after the US Department of Energy shrugged off refill plan of Strategic Petroleum Reserves, and said, won't happen until after fiscal FY23. As crude burns, Indian oil stocks witnessed minimal shocks of the broad-based selloff in the overall market. JM Financial is optimistic about three Indian oil and gas stocks as it expects the oil market to tighten ahead as the EU’s embargo on Russian oil takes full effect by the end of the current year amidst limited OPEC+ spare capacity.

According to the latest report authored by Dayanand Mittal analyst at JM Financial, the price of Brent crude corrected to below USD 90/bbl last week, for the first time since Russia’s invasion of Ukraine, on oil demand concerns due to renewed lockdowns in China and the global economic slowdown. Hence, IEA also marginally cut its CY22 global oil demand growth estimate by ~0.1mmbpd for CY22; oil demand worries, however, are partly offset by switching of demand from gas to oil given record high gas prices (at 3-4x of equivalent oil price).

However, in the note, Mittal highlighted that the OECD oil inventory is still 275mmbbl below the 5-year average and OPEC+ announced a symbolic cut of 0.1mmbpd in output for Oct’22 to support oil prices despite its output continuing to lag targeted output by ~3.4mmbpd.

Further, Mittal's note said, the oil market may tighten as EU’s embargo on Russian oil takes full effect by end-CY22 amidst limited OPEC+ spare capacity of 3-4mmbpd. Moreover, refining demand supply is expected to remain tight due to continued weakness in China’s refining throughput and limited refining spare capacity outside China.

Following the above, JM Financial has maintained a 'Buy' rating on ONGC with a target price of 205, Oil India with a target price of 265, and GAIL with a target price of 125 per share.

"We maintain BUY on ONGC (TP 205), Oil India (TP 265), and GAIL (TP 125) as they are the key beneficiaries of high crude and gas prices. At CMP, ONGC/Oil India is discounting only $50/bbl crude price, significantly below net realisation of $75/bbl that it might earn after adjusting for windfall tax," Mittal's note said.

Also, the note said, a higher crude price improves the earnings visibility of GAIL’s gas trading and downstream businesses, which constitute 40-50% of its EBITDA.

In its note, JM Financial analyst also pointed out that if FY24 net crude realisation reduces by $5.0/bbl, our valuation will change by - 21/share (or -10.3%) for ONGC and - 38/share (or -14.3%) for Oil India. Similarly if gas realisation changes by +/- 0.5 USD/mmbtu, their valuation will change by +/- 10/share (or 10.0%) for ONGC and by +/- 22/share (or 8.5%) for Oil India.

On Thursday, ONGC and GAIL shares settled flat at 132.60 apiece and 91.25 apiece respectively on BSE compared to the previous closing. Oil India shares were in the green, however, closed on a subdued level at 188.30 apiece.

Currently, Brent crude slips over 3% to trade near $91 per barrel, while US West Texas Intermediate futures plunged over 3.3% to perform at around $85.5 per barrel. So far, in the day, both crude benchmarks have dived by about 4% each.

On Wednesday, Dr. V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services said, "Global growth slowdown is now almost a certainty. The Euro-Zone, struggling under the grip of an unprecedented energy crisis, is on the verge of a recession. China's property market crisis is deepening. The latest inflation numbers in the US indicate that the Fed has no option but to remain hawkish for some time. With all three global growth engines in slowdown mode, crude demand is unlikely to remain strong enough to support prices at the present level."

 

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint.

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