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Oil and Gas stocks getting cheaper by the day: IIFL Securities

The benchmark SG GRMs continue to remain volatile. Government has a challenge to balance contrasting factors - health of OMCs, attractive compensation for upstream without adversely affecting its own fiscal, and end-consumer prices. Cheap PSU valuations reflect such issues adequately, believe analysts at IIFL Securities.

September 21, 2022 10:13 IST | India Infoline News Service
GRMs moderate

The SG benchmark GRMs have moderated to US$-2.5/bbl vs peak of US$30/bbl, as gasoline and FO spreads fall. In the past few days, gasoil and ATF spreads are down 35-40%, sensing demand moderation. OMCs could materially gain if the trend sustains; margins on petrol are ~Rs10/ltr. The demand is holding up well, with August sales of POL up by 16% YoY, led by HSD and ATF. The PP/PE deltas are up MoM by 5-26%, while PX/PTA/MEG too showing signs of revival with spreads up 1-29% MoM due to softness in RMC. Demand continues to remain weak across the chain.

APM gas price reset, windfall tax review

With key state elections lined up in H2FY23, it needs to be seen how the government deals with issues like hiking APM gas price (possible hike in CNG, power, fertilizer costs, etc.), reviewing windfall tax on oil and exports (lower revenues), and extending financial assistance to OMCs. Analysts at IIFL Securities model US$75/bbl oil for upstream; without subsidy, OMCs will report losses of Rs300 billion-400 billion in FY23. The recommendations of Kirit Parikh Committee - set up for review of domestic gas pricing formula - will be critical. Status quo implies ~40% hike in price from H2FY23 to players like RIL/ONGC/OIL.
 
Cheap getting cheaper by the day

Sectoral valuations remain compelling with PSUs trading at 0.5-1.3x FY22 BV - well below their P/BV average through FY07-22 - reflecting the uncertain macro. Finalization of subsidy payment mechanism can re-rate stocks; analysts at IIFL Securities continue to prefer OMCs over upstream. CGDs, as highlighted in their recent sector note, are on much stronger wicket, but ought to maintain prudence on capital allocation. Gujarat Gas is their preferred pick among CGDs.

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