Sell IOC, HPCL; hold BPCL: JM Financial on OMCs as crude oil stays below $70

JM Financial has advised investors to sell shares in Indian Oil Corporation (IOC) and Hindustan Petroleum Corporation Limited (HPCL), while maintaining a hold on Bharat Petroleum Corporation Limited (BPCL). The recommendation comes amid concerns over the unfavourable risk-reward balance linked to these companies' aggressive capital expenditure plans. Additionally, the valuations of HPCL and BPCL are currently 10-40 above their historical averages, which raises sustainability risks for their high marketing margins.

The domestic brokerage has also highlighted its positive outlook on Oil and Natural Gas Corporation (ONGC) and Oil India Limited. According to JM Financial, the risk-reward is favourable for these companies due to current market prices discounting crude realisation at approximately USD 60 per barrel. With crude prices below $70 per barrel, any increase in oil price is expected to significantly boost their earnings per share (EPS) by 1.5-2 per cent. This potential for increased earnings makes them attractive investments.

ONGC and Oil India are anticipated to experience earnings growth driven by a robust production increase of around 15% and 25%, respectively, over the next 1-3 years. Oil India is also set to benefit from the expansion of the Numaligarh Refinery Limited (NRL) from 3 million metric tonnes per annum (mmtpa) to 9 mmtpa by December 2025. This expansion is expected to contribute positively to the company's production capabilities.

The International Energy Agency (IEA) anticipates muted growth in oil demand in 2025 and 2026, projecting an increase of approximately 0.7 million barrels per day. Meanwhile, global oil supply is expected to rise due to OPEC+ accelerated output hikes, which may result in a supply surplus. This context provides a backdrop for the continued cautious positioning on IOC, HPCL, and BPCL by JM Financial.

Crude prices have been fluctuating; however, they are expected to stabilise around USD 70 per barrel in the medium term. Such stabilisation is considered critical to prevent potential negative impacts on US shale oil capital expenditure and to avoid a significant rise in Saudi Arabia’s fiscal deficit.

In the broader market context, the focus remains on crude stabilisation and production growth for companies like ONGC and Oil India, which are strategically positioned to navigate the current market dynamics more robustly. The ongoing expansion efforts and strategic evaluations are likely to bolster their market positions, enhancing their competitive edge.

JM Financial's recommendations reflect a strategic alignment with market conditions, urging investors to be mindful of the valuation and market dynamics affecting HPCL, IOC, and BPCL. Meanwhile, the firm's positive stance on ONGC and Oil India underscores their potential in capturing favourable market opportunities through strategic growth initiatives.

As the global oil landscape evolves, investors are encouraged to monitor developments closely, particularly with regard to production capacities and global oil price fluctuations. Companies like ONGC and Oil India may offer more stable prospects given their current strategies and market conditions, making them potentially safer bets in a volatile market.