Oil & Gas: Relatively stable macro ahead

9 Jan 2024 , 11:41 AM

Relative to the past 18-24 months, macro landscape for the O&G sector should be less volatile in CY24; reflected in US$75-85/bbl Brent, ~US$6/bbl GRMs, and benign LNG. This is at a time when valuations are compelling across PSUs, particularly upstream and OMCs, which analysts of IIFL Capital Services like the most. Large gas utilities (GAIL, PLNG, etc.) are cheap and offer good trades in benign LNG environment; amongst CGDs, IGL stands out well. Ramp up in B2C businesses and clarity on green energy business should re-rate RIL. 

Relatively stable macro: 

Analysts of IIFL Capital Services expect a relatively benign macro in the Indian Energy sector with commodity prices, spreads and consumption expected to be less volatile in the next 2-3 quarters. Analysts of IIFL Capital Services base their earnings basis oil averaging US$75-85/bbl, with OPEC+ cuts offsetting weak global macro. Bunching of refinery capacity adds (~2.5mbpd through CY24/CY25) should normalise the GRMs to ~US$6/bbl. With the EU peak consumption season behind, LNG prices should remain stable. Meanwhile, domestically, POL demand is set to grow at 3-4% p.a., accompanied by sustained gas demand and driven by CGDs and refineries. 

Earnings check: 

After a record FY24, OMCs may see PAT decline in FY25 on normalisation of margins, while, upstream cos will see flattish earnings during the same period. Gas utilities like GAIL and PLNG should grow PAT at 5-12% p.a., driven by favourable pricing and volumes. Although CNGheavy CGDs will see volume growth, MGL may see margin moderation for which earnings may fall in FY25. IGL should register 9% p.a. PAT growth through FY24-26, whereas GGAS can see material upgrades provided the growth strategy to balance volumes and margins is firmly in place. 

Inexpensive valuations: 

On FY25, sectoral valuations are cheap at 5- 9x P/E and 5-6% dividend yields; benign macro should improve earnings visibility and re-rate the stocks. Analysts of IIFL Capital Services like OMCs the most, which trade below / at LT average on P/E, EV/Ebitda multiples and offer earnings upsides in FY24/FY25; upstream companies, GAIL, PLNG’s, etc., can offer trading opportunities in a stable macro; valuations too, are not expensive relative to the past. RIL is also well placed; retain BUY.