Low crude oil prices and high marketing margins: Is it time to buy oil and gas stocks? Top picks

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Updated: April 1, 2020 6:07:03 PM

Falling crude oil prices might help India trim down the spiking inflation but oil marketing companies have been witnessing a slumping demand owing to the 21-day lockdown.

Having fallen more than 30% since the beginning of this year, the beaten down prices have made these stocks attractive.

Falling crude oil prices might help India trim down the spiking inflation but oil marketing companies have been witnessing a slumping demand owing to the 21-day lockdown which is likely to affect their revenues despite high marketing margins. “Very weak Singapore GRMS, complete collapse of fuel demand due to the shutdown and even refining thruput shutdown coupled with the inventory loss owing to a US$12/bbl decline in average crude prices (and much sharper US$30/bbl dip over 2nd -3rd week of March) will combined to deliver very weak Q4FY20-Q1FY21E,” said analysts at Centrum Broking.

Although the demand slump does pose an imminent grim outlook three brokerages have separately picked out three PSU stocks in the Oil and Gas sector that have the potential to gain as much as 64% on the current market price. Having fallen more than 30% since the beginning of this year, the beaten down prices have made these stocks attractive. As demand resumes in the coming quarters, ICICI Securities, Kotak Institutional Equities and Centrum see these stocks trading up.

HPCL

Target price: 253 (ICICI Securities); 250 (KIE); 270(Centrum Broking)

Currently trading at Rs 184 per share, HPLC is down 31% year-to-date. HPLC’s integrated margin are up 50-67%, and it is starting at an inventory loss of $6.7/bbl, according to ICICI Securities. “In addition to the weakness being seen in refining margins, HPCL is also likely to see a decline in Refining thruput rates for the first time in the past several years – Combined with the sharply lower fuel consumption growth, EPS estimates for FY21/22E see a sharp decline,” noted Centrum Broking in a research note. For the scrip to reach the target price pegged by Centrum Broking it will need to jump 46% from the current market price.

BPCL

Target price: 465 (ICICI Securities); 490 (KIE); 365 (Centrum Broking)

BPCL, according to ICICI Securities is looking at $6.4/bbl  crude inventory loss. “Sharp correction in downstream stocks has made valuations attractive and higher marketing margins on auto fuels amid declining global crude oil prices will offset sustained weakness in underlying refining margins and one-time inventory loss,” said Kotak Institutional Equities while highlighting the positives for downstream companies in the current market scenario. BPCL has an upside of 62% from its current market price. 

IOCL

Target price: 119 (ICICI Securities); 130 (KIE); 110 (Centrum Broking)

India’s largest downstream oil company and will reap the benefit of higher marketing margins. “IOC’s Mathura, Bongaigaon and Guwahati refineries will take Euro VI related shutdown in Q4FY20. This is likely to reduce its auto fuels yield and hit GRM to that extent,” said ICICI Securities. IOCL also gets impacted by sharply lower Petchem earnings due to a weak demand environment, according to Centrum Broking. For IOC to reach the fair value price pegged by Kotak Institutional Equities it will have to move up by 64%.

(The stock recommendations in this story are by the respective research and brokerage firms. Financial Express Online does not bear any responsibility for their investment advice. Please consult your investment advisor before investing.)

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