Higher crude prices likely to bring more upside for ONGC, OIL and GAIL

Mumbai: Shares of ONGCOil India and GAIL are poised for more upsides as rising crude and gas prices are expected to boost their profitability. Brent crude prices have rallied 35% in the past one month to $122 per barrel on Tuesday as economic sanctions on Russia have aggravated supply concerns.

“ONGC, Oil India, and GAIL are the key beneficiaries of rising crude prices,” said Dayanand Mittal, analyst, JM Financial. “ONGC and Oil India are discounting $60-65 per barrel brent at the current market price. Every $1 per barrel rise in crude realization implies a 2-4% increase in earnings per share of these two companies.”

Higher crude price could also improve the earnings visibility of GAIL’s gas trading and downstream businesses, said Mittal.

ONGC and Oil India shares have rallied nearly 12% in the last five trading sessions compared to a 5% decline in the Nifty. Gail shares gained almost 9% in a week.

Russia is one of the biggest exporters of crude. Oil prices have been rising because of the supply shortfalls.

Higher domestic gas prices are also positive for ONGC and Oil India.

“A surge in oil and gas prices will benefit upstream, and gas utility companies as realisation will be higher,” said Mayur Matani, analyst, ICICI Securities. “However, if LNG prices sustain at high levels, it will impact margins of city gas distributor such as Indraprastha Gas and Mahanagar Gas as the company’s sourcing costs will be higher for incremental volumes.”

ICICI Securities has increased its FY24 EPS estimates for ONGC by 9%. For Indraprastha Gas, Mahanagar Gas, and Gujarat Gas, the brokerage has cut estimates by 19%, 17%, and 24%, respectively.

Oil marketing and refining companies such as BPCL, HPCL, and Indian Oil too could be hurt by higher crude prices, according to analysts.

The risk for ONGC and OIL India is that the government might ask them to share a portion of the retail fuel subsidy burden.

“In addition to excise duty cut and increase in retail prices, the government may summon ONGC, OIL, and GAIL to do national duty by ensuring that supernormal profits above a certain threshold will not accrue to these companies,” said Ajay Bodke, an independent market analyst. “Still, they are made for sharing these supernormal profits to lighten the load on pump prices paid by consumers and this has happened in the past and is very logical too,” Bodke added.


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