Oil and Gas Sector Update : Key takeaways from meeting with MoPNG and IOCL By JM Financial Services Ltd
We attended the meeting of the Minister of Petroleum and Natural Gas (MoPNG) and the Petroleum secretary with analysts/investors; we also interacted with the IOCL CMD to understand the company’s growth strategy. The agenda of MoPNG’s continued interaction with the analyst/investor community in the last 1-2 years is to better understand and address the key concerns that result in Indian O&G PSUs trading at a significant discount to peers from the private sector and from other industries. The MOPNG tried to address key investor arguments for valuation discounts like: a) volatility in earnings for O&G PSUs; b) O&G PSUs’ poor capital allocation decisions and their being considered an extended arm of the government; and c) O&G PSUs are not future ready; also, there is intensifying competition. Further, the MoPNG also highlighted that the government had noted investor concerns and taken the following measures to address the same in the last few years: a) timely support to OMCs for LPG under-recoveries by giving INR 520bn compensation since Oct’22; b) longer tenures for CMDs/directors to ensure strategic continuity; c) performance-linked accountability by ensuring leadership appraisal is directly tied to business performance; d) minimal pricing intervention over a long period of time. The ministry also reiterated that with the passage of the ORD Amendment Act in Mar’25 providing for fiscal stability, it will be very difficult for any government in future to impose windfall tax (SAED) on any oil and gas field (nominated and other fields of private players as well).
* MoPNG tried to understand & address concerns resulting in Indian O&G PSUs’ valuation discount: The agenda of the MoPNG’s continued interaction with the analyst/investor community in the last 1- 2 years is to better understand and address the key concerns that result in Indian O&G (Oil & Gas) PSUs trading at a significant discount to peers from the private sector and other industries. The MOPNG tried to address key investor arguments for valuation discounts like: a) Volatility in earnings for O&G PSUs: MoPNG argued that O&G PSUs has delivered: i) 9.8% EBITDA CAGR over FY15-25 (despite some volatility in earnings in between given the cyclical nature of the business) and ii) has built an unparalleled scale in terms of infrastructure; b) O&G PSUs’ poor capital allocation decisions and being considered an extended arm of the government: MoPNG argued that i) O&G PSUs’ capex is approved only if it meets the desired hurdle IRR rate and ii) Refining and petchem capex is required given huge scope for growth in domestic oil and petchem demand; and c) O&G PSUs are not future ready; also, there is intensifying competition: the MoPNG argued that O&G PSUs capex on petchem, renewable energy, gas is to future-proof the business. Also, companies are targeting operational excellence by launching targeted EBITDA improvement plans, accelerating capex delivery by ensuring timely execution of large projects and within budgeted cost, etc.
* Government measures to address investor concerns in last few years: a) timely support to OMCs for LPG under-recoveries by giving INR 520bn compensation since Oct’22. Also, LPG is a running account (and not an annual account); hence, the INR 60bn shortfall in LPG compensation in Oct’22 (paid INR 220bn vis-à-vis LPG under-recovery of Rs280bn) was recovered by OMCs from subsequent period over-recoveries; b) longer tenures for CMDs/directors to ensure strategic continuity; c) performance-linked accountability by ensuring leadership appraisal is directly tied to business performance (revenue, EBITDA, capex, shareholder return, etc.); d) Minimal pricing intervention over a long period of time. The ministry highlighted that it’s difficult for the government to provide visibility on a range of integrated margin for OMCs as end retail auto-fuel price is largely fixed in India (due to political compulsions) while crude price is highly volatile; hence, it becomes very difficult for the government to give a range on OMCs’ integrated margin. It reiterated that the government has given OMCs freedom to source from Russia if it’s economical. However, it highlighted that India is also increasing its energy imports from the US as well, with India’s energy (crude + gas etc.) import from US up 25% YoY in 1HCY25; it was at USD 15bn in CY24.
* ORD Amendment Act 2025 to ensure no windfall tax is imposed on any O&G field in future; government will look at ways to unlock value via eliminating cross-holding amongst O&G PSUs: The MoPNG reiterated that with the enactment of the ORD (Oil Regulation development) Amendment Act in Mar’2025 providing for fiscal stability, it will be very difficult for any government in future to impose windfall tax (SAED) on any oil and gas field (nominated and other fields of private players as well). Separately, on value unlocking via reducing cross-holding amongst O&G PSUs, the MoPNG said it is aware of the concerns and is assessing various options to address this challenge.
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