Oil & Gas - Sector Update - Price hikes to remove overhang - Prabhudas Lilladher

Mr. Avishek Datta, Research Analyst at Prabhudas Lilladher

Quick Pointers:

- Retail price hike a relief as it removes an overhang of subsidy sharing.

- Prefer upstream companies as they benefit from higher oil and gas realization, while marketing margins are likely to be weak in an inflationary environment.

In a significant decision the OMCs have raised the retail prices of petrol and diesel by Rs0.8/litre today, first since November 21. The companies also raised the LPG price by Rs50/cylinder to Rs950. The move removes an overhang of sizeable marketing losses of over Rs12/litre being borne by the OMCs and upstream companies. With crude oil prices rising due to geopolitical tensions, the price hike was important even if delayed. We reiterate our Overweight stance on the sector but prefer upstream companies like OIL, GAIL, ONGC on back of rising crude oil and gas prices.

Retail price hike finally is here with much delay: For the first time since November 21 the OMCs have raised retail prices of petrol and diesel by Rs0.8/litre today. The companies have also raised the LPG prices to Rs950/cylinder. The move is significant as marketing losses had increased to over Rs12/litre due to high crude oil prices. We expect retail price hikes to continue to make up for the marketing losses. Retail price were left unchanged due to state elections in key states of UP, Punjab, Uttrakhand, Goa and Manipur.

Removes an overhang: The retail price hike removes an overhang of rising marketing losses being borne by the oil companies- OMCs and upstream companies. The oil companies have not borne any losses since FY16 due to low crude oil prices and regular increase in retail prices in case of rise in crude oil prices. Our estimates for the companies' don't factor in any subsidy sharing. For Q4, despite marketing losses, we expect OMCs to make profits of Rs172bn (Q3FY22:Rs92bn) on back of strong GRMs and inventory gains of Rs225bn.

Prefer upstream companies: We reiterate our overweight stance on the sector but prefer upstream companies as they benefit from rising crude oil and gas prices. GAIL also benefits from high gas trading and LPG realisations. The OMCs will also benefit from strong GRMs, but marketing margins are likely to come under pressure in a high crude inflationary environment. We had recently trimmed our marketing margin assumptions to Rs3.0/3.5/litre for petrol and diesel for FY23/24E from Rs4.2/4.5 earlier given price hike delays (Refer our recent report). We maintain our estimates on OMCs and upstream companies.

Source : Equity Bulls

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Oil Gas SectorUpdate PrabhudasLilladher