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Energy price spike to benefit upstream and GAIL; OMCs’ valuation also attractive

We are raising our FY23/24 Brent price estimate to USD100/80 per barrel from USD80/75 while retaining our long-term assumption at USD75/bbl. FY22 average is expected to be ~USD80/bbl. With recent weakness, we see rupee at 78/77 in FY23/24.

Global gas has witnessed significant volatility, especially NBP and spot LNG, which are up to USD60/mmbtu+ each. Against USD6.5/mmbtu APM price expected in H1FY23, H2 run-rate is USD12+ and current global prices imply over USD20/mmbtu. Hence, we conservatively build in USD6 each for FY23/24E and USD5 for the long term. We believe severe distortion in NBP prices could lead to a revisit in the APM pricing formula though USD5-6 could be the floor considering the pricing of other gas and ONGC’s plea for it.

GRMs have also seen heightened volatility, with the benchmark ranging from under USD4/bbl to over USD10/bbl since Russia’s Ukraine invasion started. We are largely assuming USD5.5-6.0/bbl for all three OMCs in FY23/24 as the impact on supplies could be offset by demand hit from higher oil prices.

Petrol-diesel marketing margins are at negative Rs6.5-9.1/ltr, based on 15 DMA though current USD130/bbl Brent calls for an eventual hike of Rs28-30/ltr on the basis of current adjusted cracks. In our view, a coordinated action involving excise cuts, VAT reduction and RSP hikes are required as OMCs already operate with wafer thin EBITDA margins. LPG price hike is also necessary as the current under-recovery of Rs200/cy on a total domestic base of 25mmtpa implies an Rs350bn loss and it can further swell.

Q4FY22 earnings of OMCs should be supported by heavy inventory gains as crude closes almost USD50/bbl higher between quarter ends (assuming current prices). Hence, the impact of the price freeze could be absorbed this time, but it is necessary to revert to normative margins going ahead, though core GRM strength can provide some cushion.

ONGC, Oil India, IOCL and BPCL have Russian exposure, which could be impacted with foreign operators exiting the country and dividend repatriation affected by financial sanctions. We estimate an impairment loss of up to Rs28/share for ONGC and Rs32/share for Oil India, while for IOCL and BPCL, it should be Rs8 and Rs20, respectively, although we had never built this into our standalone valuations.

We cut BPCL’s FY23/24E S/A EPS by 8/9%, equalizing its GRMs with HPCL, where we raise EPS by 6-7% and IOCL’s slightly by 1-2%. However, we lower our Mar’24E EV/EBITDA target multiple to 5.5-5.7x from 5.9-6.3x, seeking more clarity on auto-fuel and LPG pricing. Retain Buy on IOCL/BPCL/HPCL with revised TPs of Rs155/460/330.

We raise ONGC’s FY23/24E EPS by 38%/12%, with Buy rating and TP of Rs230. For Oil India, we raise EPS by 22%/5% with Buy and TP of Rs335. GAIL should benefit from higher oil prices and expansion in LNG/NBP vs. Henry Hub spreads. We raise FY23E EPS by 32% but FY24E is up 3% on modest LNG margins. Retain Buy with Rs210 TP

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