In this article, Being Inkspired will discuss the top oil company stocks to purchase in India 2020. This article will be an educational article and we shall discuss the oil and gas sector outlook for FY 2022.
We will also study the performance of all the oil and gas companies in India to find out the four most profitable companies for investment. We will analyze the performance of these companies in Q2 FY 21 as this is the first quarter after the nationwide lockdown imposed in March 2020
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The top oil company stocks will be selected from a universe of approximately 50 companies engaged in energy marketing, oil and gas distribution, and the city gas distribution sector.
Read the entire post to find out the top companies !!!!
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Oil company stocks - Sector Outlook
The oil and gas sector is among the eight core industries in India and it also plays a crucial role in influencing decision making for all the other important sectors of the economy. Sectors like FMCG and petrochemicals are entirely dependant on the oil and gas sector for their raw materials.
India is the largest consumer of energy in the world and its oil and gas sector should be sufficient to meet its growing energy needs
India has been the fourth-largest Liquefied Natural Gas (LNG) importer since 2011 after Japan, South Korea, and China.
Consumption of petroleum products has recovered to pre-COVID-19 levels and more importantly, auto fuel demand has shown growth on a y-o-y basis in October 2020 which is a positive sign for oil shares.
Robust price and volume recovery, overall improvement in marketing margin, the benefit of the Middle East crude discounts, and lower interest cost provides strong earnings visibility for oil and gas stock prices over FY2021E-FY2023E.
Energy companies are also expected to witness sharp improvement in earnings given the sizable margin expansion led by a sharp cut in domestic gas price (to $1.79/MMBtu on gross calorific value for H2FY2021) and recovery in a volume that is now close to pre-COVOD-19 level (CNG at 90-95% and industrial and domestic PNG witnessing y-o-y growth).
We retain our cautious view on the earnings outlook for upstream PSUs due to the low oil & gas price environment and weak production profile given aging fields (natural production decline of 8-10%).
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Oil Company Stocks Outlook
We expect a much faster volume/earnings recovery for CGD players; strong earnings visibility for OMCs: The recovery in CNG demand has been very encouraging at 90-95% of the pre-COVID-19 level in November (versus 25-35% in Q1FY2021) and is expected to normalize much earlier over Q3-Q4FY2021 versus earlier expectation of FY2022.
Thus, we expect CGD players like MGL, IGL, Gujrat Gas, Adani Gas to witness strong earnings growth over FY2022E-FY2023E as margins are likely to remain strong while gas sales volume would register robust growth on a low base of FY2021.
We believe that a strong volume recovery for auto fuels (above pre-COVID-19 level) and higher petrol & diesel (accounts for>50% of total petroleum consumption) gross marketing margin has improved earnings visibility for OMCs over FY2021E-FY2023E.
Although we expect delays in BPCL divestment, privatization of PSU’s like HPCL, BPCL could lead to a strong re-rating of OMCs and create long term value for investors.
Natural Gas Stock Prices Outlook - Top oil company stocks
Natural and City Gas Distribution (CGD) players witnessed robust volume recovery (IGL - 84%, MGL - 69%, and Gujarat Gas -105% of a pre-COVID-19 level) in Q2FY2021 as demand recovered sharply post the relaxation of lockdown norms while EBITDA margin was also strong with the improvement of 17%-88% y-o-y primarily led by lower natural gas prices (23-32% y-o-y) decline on account of cut in domestic gas and lower spot LNG price.
Hence earnings of CNG and City Gas Distribution companies were much ahead of our expectations.
Our preferred oil company stocks in the CDG segment include Mahanagar Gas Limited (MGL), IGL, Gujrat Gas, and Petronet LNG.
Oil and Gas stocks prices outlook - Oil stocks to buy in OMC’s
Oil marketing companies (OMCs) also reported very strong earnings growth led by inventory gains of Rs 11,633 crore versus inventory loss of Rs 1,151 crore in Q2FY2020 and sharp volume recovery of nearly 85%-90% of pre-COVID-19 levels.
However, core GRMs(adjusted for refinery gain) remained subdued across OMCs but HPCL outperformed with core GRM of $2.7/bbl as compared to $1.5/bbl for BPCL and negative -$1/bbl for IOCL.
Even in terms of refinery utilization rate, HPCL was much better at 103% versus 82% for BPCL and 80% for IOCL.
Earnings performance of upstream PSUs continued to feel the impact of lower oil realization (down 31%y-o-y) and weak domestic gas price along with lower oil/gas sales volume.
Our preferred picks in the OMC segment include HPCL as it has outperformed its listed peers.
We will advise staying away from BPCL as the government is unlikely to complete its divestment targets till FY 2021
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Best Oil Stocks to own - Top Oil company stocks
Mahanagar Gas Limited - Volume recovery on track and improvement in margins makes it one of the top oil company stocks to own
MGL reported a much lower-than-expected decline of 32.6% y-o-y in its PAT to Rs. 144 crore in Q2FY2021 due to higher-than-expected EBITDA margin at Rs. 11.6/ scm (up 17% y-o-y) and marginal beat in volume at 2.1 mmscmd (up 86.3% q-o-q).
CNG volume stood at 58% of the pre-COVID-19 level at 1.3mmscmd in Q2FY2021, while domestic PNG volume grew by 21.6% y-o-y to 0.46mmscmd, and industrial/commercial PNG volume declined by 20% y-o-y to 0.33 mmscmd.
MGL’s earnings are likely to recover sharply in H2FY2021. So, MGL is one of the best stocks to buy in this segment
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