US-Iran war lifts crude: Why ONGC, Oil India could be biggest gainers in Indian stock market

The intensifying tensions between the US and Iran have led to the closure of the Strait of Hormuz, through which nearly 20% of global oil and LNG flows, resulting in a sharp jump in crude oil prices, with Brent crude rallying to $85 per barrel from $73 per barrel since the war began.

The sharp rise in crude oil prices has rattled global equities, especially Asian markets, as concerns have grown that a prolonged shutdown of the Strait of Hormuz could have cascading effects on economies, as the region is heavily dependent on crude imports.

Crude is not just a fuel that supports the economy in running smoothly, but it is also a major raw material for many industries, which can affect their margins if they have to source oil at higher prices.

Higher crude prices benefit ONGC and Oil India

However, upstream oil producers such as Oil and Natural Gas Corporation (ONGC) and Oil India Limited are likely to benefit from rising crude prices, as their revenue is directly linked to the price at which crude oil is sold in the market.

Domestic brokerage firm JM Financial said in its latest report that both ONGC and Oil India will be the key beneficiaries if Brent sustains above $70 per barrel. It estimates that every $1 per barrel rise in oil prices boosts their earnings by 1.5–2% each.

The brokerage has a ‘Buy’ rating on both Oil India and ONGC, with target prices of ₹560 and ₹320, respectively. The brokerage arrives at these price targets based on its Brent crude price assumption of $70 per barrel and likely oil and gas output growth over the next two to three years.

At the current market price, ONGC and Oil India are discounting $68–70 per barrel net crude realisation, assuming a 7–7.5x FY28E P/E for the standalone E&P business.

Emkay Global also shared its bullish view on the upstream oil companies.

“For every USD5/bbl increase in Brent price above USD70/bbl, ONGC/Oil India’s SA EPS goes up by 13%/10%,” said the brokerage, raising the target price by 5% each to ₹315 for ONGC shares and ₹550 for Oil India shares, building in $70/bbl Brent for the long term (from $67 earlier). It retained its 'Add' call on both PSU oil stocks.

Negative for OMCs

For oil marketing companies (OMCs), the brokerage said that auto-fuel gross marketing margins (GMM) could be hit if Brent sustains above $70 per barrel, as they typically earn their historical ₹3.5–4 per litre margin at Brent prices of around $70 per barrel.

According to brokerage estimates, for every $1 per barrel rise in crude prices, OMCs’ auto-fuel GMM declines by ₹0.55 per litre (assuming no change in retail petrol and diesel prices and excise duty), dragging down their consolidated EBITDA by 7–9%, with Hindustan Petroleum Corporation Limited likely to be the worst hit given its highest leverage to the marketing business.

Qatar LNG shutdown may hit volumes of GAIL, Petronet LNG, Gujarat Gas

QatarEnergy LNG (QatarGas) has announced that it has stopped LNG output at its main facility after military attacks. This is Qatar’s primary LNG facility and handles 82 mmtpa of LNG, or nearly 25% of global LNG supply.

If this shutdown sustains itself for a prolonged period, it could lead to a temporary spike in spot LNG prices. European gas prices have already jumped 70–80% to $18–19 per mmbtu.

The brokerage added that this could temporarily hurt India’s LNG/gas demand and therefore could be a near-term negative for volumes and margins for companies such as GAIL (India), Petronet LNG, Gujarat Gas, Gujarat State Petronet, Indraprastha Gas, and Mahanagar Gas.

It could also cause a temporary disruption of LNG supply to Petronet LNG, given that the company receives 8.5 mmtpa of LNG from Qatar (around 50% of its total volumes), which could act as a near-term negative for PLNG’s volumes, the brokerage noted.

Disclaimer: This story is for educational purposes only. The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.