Oil & Gas sector update - Geojit BNP Paribas Financial Services

- Crucial diesel price hike to determine future course for OMCs Since the recent decline in crude prices, diesel losses have declined from Rs.10/ltr to Rs.4.5/ltr. The upcoming diesel price hike is therefore of outmost importance as it will chart the way for how the GOI intends to handle de-regulation of diesel. A diesel price hike now would show the GoI's resolve and this would be positive for PSU oil & marketing stocks.

- Much hinges on diesel price hike outcome If crude oil prices average at USD100/bbl for the rest of FY14 then the under-recoveries in FY13 would fall to USD19/bbl from USD30/bbl. Hence, much hinges on continued diesel price hikes. We expect clarity on possible diesel price hikes before the end of the month and this would see as a good representation of the GoI's intent on reform.

- Reiterate 'buy' on BPCL & HPCL, 'hold' is maintained on ONGC Reiterate buy on BPCL with an unchanged TP of 431. The recent rally was on the back of declining crude prices and the E&P story gaining traction. The story has been muted from a newsflow perspective but remains strong on potential M&A activity by partners.

- Downside risks: increase in crude prices and delay in diesel price hikes.

- Reiterate 'buy' on HPCL with an unchanged TP of 345. HPCL unlike BPCL is primarily a valuation play combined with benefits from declining crude prices and the resultant lower under-recoveries. In a declining crude environment, HPCL benefits the most due to its high leverage to the marketing side of its business as compared to BPCL.

- Risks: Decline in crude prices and a delay in diesel price hikes.

- Reiterate 'hold' rating on ONGC with a target price of Rs.335/. Shares of ONGC have rallied from recent lows and it seems that there is not much upside from here as benefits from declining crude begin to get priced in.

- Upside risk: greater-than-expected gas price hike. Downside risk: increase in crude oil prices.

Source : Equity Bulls

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