RIL, BPCL, HPCL, IOC, ONGC, GAIL, GSPL, IGL, MGL, Gujarat Gas, Petronet LNG: Buy or sell?

A sharp rise in oil prices globally, driven by the ongoing war in West Asia, has brought oil & gas stocks back in focus. Stock analysts see supply-side stress on oil and expect gas supplies to be rationed in the near term. This may have implications for oil refiners, companies in gas value chain, city gas distributors as well as oil marketing companies (OMCs), they said. 

While physical crude volumes may be sustained through alternate sourcing, the cost structure will deteriorate sharply, said Sumit Pokharna, VP  Fundamental Research at Kotak Securities. For oil marketing companies (OMCs), given retail fuel prices are effectively frozen, higher feedstock and logistics costs will compress marketing margins. "Earnings visibility weakens meaningfully under this scenario," he said.

Gas transmission and LNG importers such as GAIL and Petronet LNG Ltd are expected to face curtailed volumes and higher landed LNG costs, pressuring both throughput and margins. City gas distributors (CGDs) such as Indraprastha Gas Ltd, Mahanagar Gas and Gujarat Gas may face higher input gas prices, potential supply cuts an margin pressure amid regulatory and competitive constraints. 

Calling the recent developments as transit shock and not a mere price shock, this analyst maintained 'Sell' on three OMCs: IOC, BPCL and HPCL. He also suggested 'Sell' on GAIL, Petronet LNG, IGL and MGL. 
 
Oil refiners such as ONGC and Oil India can be clear winners on immediate basis, due to higher average selling price.

However, the brokearge is wary of government imposing windfall tax if oil prices go too high. There has also been disruption reported at Saudi Aramco’s  550kbpd Ras Tanura refinery, which has now shut operations following the drone strikes. European diesel margins rose 26 per cent to their highest level since November 2020. 

"We prefer Oil India as a play on the potential spike in refining GRMs due to disruption in refining operations in the Middle East," Nomura said.

Nomura said Reliance Industries Ltd could also benefit from potential spike in refinery GRMs if attack on refining assets in the Middle East intensifies.