What is the road ahead for the ailing Oil & Gas sector? Analysts decode

The oil and gas industry in India is grappling with a complex crisis driven by global economic challenges, ineffective policy frameworks, and widespread structural issues within the sector. The Nifty Oil & Gas sector indices have fallen by 27% since August 2024. Following a peak intraday high of 13,607.20 on September 2, 2024, the sectoral indices have been on a downward slope.

Out of the 15 stocks in the Nifty Oil & Gas, only Indraprastha Gas (surged by 26.5%), Mahanagar Gas (rose by 13.9%), and Castrol (up by 9.5%) have shown positive performance over the last three months, while the remaining 12 stocks have recorded losses.

Among the laggards, Oil India leads with a decline of 27%, followed by GAIL with a drop of 16.3%, Gujarat State Petronet at 16%, and Gujarat Gas at 14.4%. Hindustan Petroleum Corporation Ltd (HPCL)has decreased by 13.5%, while Bharat Petroleum Corporation Ltd (BPCL) is down 12.9%, and Indian Oil Corporation has fallen by 10.3%. Adani Total Gas, Reliance Industries, Petronet LNG, Aegis Logistics, and Oil and Natural Gas Corporation (ONGC) have experienced losses ranging from 4% to 9%.

“From the September 2024 swing highs of 13,600, we have seen a major sell-off in this basket, losing around 28%. Prices have now approached a crucial support of 61.8% retracement of the major rally seen from the levels of 7,400. As of now there is no bullish reversal signs but 9800 is critical make or break level point. For a bullish confirmation Prices will need to close above 10,200 that could trigger a positive momentum towards 10,600,” said Rajesh Bhosale, Equity Technical and Derivative Analyst at Angel One.

Yes Securities, in a recent analysis, pointed out that in light of the unfavorable conditions—such as stagnant crude prices, declining refining margins, increasing LPG subsidy pressures, and deteriorating capital expenditure efficiencies—the brokerage feels it necessary to consider both bear-case and worst-case scenarios for the main players in the sector. According to their assessments of fundamentals and valuations, their top picks include HPCL, BPCL, Mahanagar Gas, GAIL, and ONGC.

Changing crude and product spread macros

In a recent report released by Yes Securities, it was noted that at the beginning of January, Brent crude prices climbed above USD82/bbl due to concerns regarding new US sanctions on Russia; however, prices later retreated to USD75/bbl as adequate demand support was lacking.

Despite ongoing geopolitical uncertainties, the oil market has shown notable resilience. Nonetheless, improving adherence to voluntary production cuts by OPEC+ will gradually diminish the anticipated supply surplus for the year. The eventual tapering of OPEC+ cuts starting in April 2025 may exert additional downward pressure on prices, according to the brokerage.

Reports indicate that oil prices stabilised on Monday as investors looked for clarity on negotiations to resolve the conflict in Ukraine and considered the possibility of crude exports resuming from northern Iraq. On Tuesday, oil prices increased for a second consecutive day as newly imposed US sanctions on Iran raised fears of tightening supply, along with strong global refining margins. Brent crude futures rose by 15 cents, or 0.2%, to $74.93 a barrel as of 0724 GMT, while U.S. West Texas Intermediate crude futures gained 23 cents, or 0.3%, to $70.93 a barrel. Both contracts experienced gains in Monday’s trading session following a $2 drop last Friday.

Oil and Gas sector Outlook

According to Anil R, Senior Research analyst, Geojit Financial Services, explained that the oil and gas sector’s Q3FY25 earnings were largely in line with YoY estimates. However, earnings for the first nine months of FY25 declined significantly compared to 9MFY24, primarily due to crude price volatility and inventory losses. In the near term, the sector is expected to deliver a mixed performance. Also, there is a possibility of moderation in volumes in the near term due to domestic growth slowdown.

Upstream companies are likely to benefit from higher crude and gas output, along with improved realizations. Conversely, OMCs may face pressure on core earnings due to elevated oil prices and a weaker rupee. Additionally, an increase in capital expenditure could moderate earnings growth.

The BSE Oil & Gas index is currently trading near its long-term average, reflecting prevailing concerns. While the sector continues to offer an attractive dividend yield, a potential ratings upgrade for OMCs would likely depend on a decline in crude prices.

Disclaimer: The views and recommendations above are those of individual analysts, experts and broking companies, not of Mint. We advise investors to check with certified experts before making any investment decisions.