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Sunny prospects for Refiners and OMCs; gas consumption scales fresh highs

After witnessing a highly volatile FY23 in both crude and gas, FY24 has brought cheer for Indian Oil & Gas companies, given that most of them reported record profits. We expect brighter prospects in FY25/FY26, but only after a potential downhill journey over FY24. Among the conducive factors are modest crude and LNG prices, higher sourcing of discounted crude, and greater domestic gas supplies. Indian refiners’ GRMs could come stronger to hold premiums to the benchmark, while possible lower crude prices and unchanged petrol and diesel retail prices could spell better marketing margins for OMCs. In a consumption-thirsty nation that India is, we expect significant volume growth across segments.

Crude prices hovering in the USD 75-85/bbl range and stronger GRMs above USD9/bbl have undoubtedly emerged as a big plus for standalone refiners and OMCs. These ranged crude prices have also ensured better marketing margins, and we believe these stronger numbers are sustainable. We build in crude prices at USD/bbl of 85/77/70, Singapore GRMs of 6.2/5.0/4.2 for FY24e/25e/26e. For Indian refiners we assume GRMS of ~USD/bbl of 8/7 and gross marketing margins for both petrol and diesel normalized at Rs2.8/ltr for FY25e/26e. Higher product demand and low refinery additions resulting in short supply could help keep up the key product cracks and sustain the GRMs. A higher sourcing of discounted Russian crude could further support profitability (10% ~USD0.5/bbl). We expect the upstream to achieve stronger profits in FY24e/FY25e and a decline in FY26e based on our crude expectations and a cap of net realization at ~USD75-77/bbl while gas prices at USD/mmbtu of 6.5/7.0/7.0 for FY24e/25e/26e should add support.

Spot LNG prices were quite volatile in FY23 and peaked at USD70/mmbtu; supply issues were unable to meet the demand, given disruption caused by shutdowns and EU moving away from Russia. The prices have fallen (currently below USD16/mmbtu) and stable despite winter, but still higher than the Indian long-term crude linked sourcing, which is ~USD11-12/mmbtu.

The Indian government aims to increase share of natural gas in energy consumption basket from ~7.5% to 15% by 2030. India hit peak gas demand of 198.1mmscmd in Oct’23, with fertilizer demand peaking, while CGD and other sector demand near high. Major supply growth should come from LNG imports given lower domestic supplies, despite additions from RIL’s MJ field and ONGC’s KG basin. Production from older fields continues to decline. In FY23, RIL’s KG basin increased domestic gas supplies and is now supplying ~30mmscmd, addressing the demand emanating from core sectors. We expect strong demand growth to continue for all sectors given falling gas prices. India gas consumption should increase by ~100mmscmd by 2030, with key contributions expected from CGD followed by miscellaneous sectors as the availability improves.

The Indian CGD sector is a key beneficiary of sustained government support via policy changes, unlike for upstream, midstream, and downstream companies. A potential benefit could emanate from lower gas prices post the approval of the Kirit Parikh Report recommendations; lower CNG and D-PNG prices could help drive volumes.

Top Picks: Overall, we are bullish on the sector, and BPCL, HPCL, CPCL and IGL are our key preferences; other names with upsides include IOCL, RIL, MAHGL and GUJGA. For the Gas utilities and upstream, we carry a ADD recommendation given the valuations and limited upside.

Risks: Some upward/downward risks to our assumptions include volatile crude prices, GRMs, marketing margins, sharper movement in LNG prices, change in government policies, and faster EV adoption affecting CGDs and the like.

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