BPCL, HPCL, IOC, ONGC, Adani Power: Morgan Stanley positive on oil stocks, flags 3 surprises

Morgan Stanley in its largest note on energy sector said it is positive on HPCL, BPCL, ONGC, Adani Power Ltd, Adani Energy Solutions Ltd and Oil India Ltd, saying India's energy demand resilience, pricing power for producers, quality of capital allocation pivot by corporates and increasing nimbleness beyond the supply shock are set to surprise investors.

Morgan Stanley said power, coal and natural gas markets are interacting much more strongly in boardrooms. "Being more nimble is structural, with energy trading to manage price risks a new normal," the foreign brokerage said.

The brokerage said spikes in merchant power prices and resilience on natural gas demand despite three times higher LNG prices are surprising positively.

"We see the return of coal and natural gas over renewables in power systems, speciality chemical supply chains getting more competitive and cycle turning up. India remains one of a few countries still looking to grow fuel refining capacity, but cost per unit has nearly doubled, implying higher fuel refining margins," Morgan Stanley said.
The three surprises Morgan Stanley mentioned included.

Surprise 1
The diffusion of coal, LNG and renewables in power and energy markets is accelerating more rapidly with the current energy shock. Limitations on grid capacity, the need for air conditioning and datacenters, rising demand for gasoline and a shift from cooking gas to CNG are leading to pricing power improvements across power and energy supply chains. Access to energy is becoming more critical, not just cost of energy.

"It's quite surprising how India's LNG consumption has not slowed despite 2.5 times higher cost of LNG vs alternative fuels even for the power sector (although coal inventories and El Niño partly played a role)," Morgan Stanley said.

Surprise 2 
Morgan Stanley said electricity spreads for fossil based power generation - gas and coal are now rising as renewable costs to serve the grid have increased. Large oil and gas corporates are producing their own renewable power but see limited incentives as result, to expand into selling grid power.

Surprise 3

Capital allocation is going toward expanding trading footprints, increasing agility by buying own tankers and expanding fuel storage and finding energy reserves, with a significant shift in narrative away from new energy
investments being top of mind since Covid.

Additionally, investments are becoming more diversified across thermal, renewables and storage as corporates shift delivering more reliable and dispatchable power with a strong focus on returns, Morgan Stanley said.