OMC stocks are offering an asymmetric payoff, making them an attractive option. The upstream companies may not fall (attractive yields), but may UPF downstream cos. Gujarat Gas is best placed on weak LNG; GAIL also gains, but stock will react more to the pipeline tariff reset which is around the corner.
Will price fall continue?
The outlook on Brent prices has considerably moderated as the fears of supply disruption are behind. A significant downside to IIFL Securities’ base case of US$75/bbl is foreseen in the event of collapse in global economic activity. As such, with OPEC and US Shale not producing more, supply remains tight. GRMs are holding up on the back of improved FO cracks at US$8/bbl (versus US$6.7/bbl MoM). Petchem cracks have inched up QoQ, but are down MoM, as demand recovery lags forecasts. Weakness in LNG prices (16% MoM), should benefit India (YTD imports down 14%), given the price volatility.
KP report holds key for CGDs
CNG-heavy CGDs expect moderation in input costs from FY24, on the back of Kirit Parikh Committee recommendation. Any delay will be an overhang on their volume growth and margins. OMCs are in a sweet spot, with robust sales growth (10% YTD), and benign oil prices; their earnings are well poised for a sharp recovery in FY24 earnings. Analysts at IIFL Securities will watch out for the inventory losses (if oil crashes towards the end of quarter). With normalization of LNG supplies, GAIL and PLNG should see relief on their TOP contracts.
OMCs offer asymmetric payoff
Dividend yields of upstream companies are in sync with global peers. A significant upside is seen only when their production growth revives (not the base case scenario). OMCs, on the other hand, offer asymmetric payoffs; they trade <BV, and can re-rate materially in a benign oil price environment. HPCL, with its net long marketing portfolio, offers beta play on the sector. GGAS (and GSPL, its hold co) is well placed to benefit from weak LNG — like GAIL, PLNG — where TOP contracts has been an issue.
