Thematic - Oil & Gas: Looking beyond near term challenges

[Amit Shah]

THEMATIC:

Oil & Gas: Looking beyond near term challenges
We are positive on oil PSUs as we expect under-recoveries to decline (driven by monthly diesel price hike) and crude price to moderate. Amongst oil PSUs, we prefer upstream PSUs (ONGC, Oil India) over OMCs (BPCL, HPCL, IOCL) due to inherent strength in their business model (value of their oil and gas reserves) and limited downside risk from derailment of fuel price reforms. We don’t expect downstream margins to strengthen, as global capacity additions are likely to outpace weak demand growth. We have ‘NO STANCE’ on Cairn India and RIL due to unclear drivers of its competitive advantage. Gas utilities fundamental to gradually improve with rise in domestic gas production, but will take 2-3years to achieve some stability.
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