Crude prices should be in the range of $85-90/bbl, says Probal Sen, Energy Analyst, ICICI Securities. Tells Prashant Nair, Surabhi Upadhyay & Reema Tendulkar that oil & gas cos are seeing good macros. He is positive on ONGC & Oil India.
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Turn our attention now to crude oil prices oil and gas crude prices have surged overnight oil marketing companies have been buzzing lately probal sen the energy Analyst at icsa Securities now joins in with his call on the oil and gas space uh probal first an open-ended question what is the outlook for 2024
The top three themes that will dominate uh the oil and gas sector next year according to you and how will this then impact the stocks well obviously crude prices as you mentioned is is always the number one monitorable that remains of interest at this point of time I think what is of
Interest is that crud remains in a fairly sweet spot as long as it remains in the range of around 75 to $85 uh per barrel I think omcs as well as well as Upstream continue to remain in a comfortable space the reason I say that
Is if you look at the last period when prices were actually held up for retail fuels uh crude prices at that time and implied product prices were in the range of 90 Plus so any price about5 to $6 less than that continues to allow Le to make healthy marketing margins even if
You were to assume that you know there could be a price decrease that could happen in gasoline and diesel prices there is enough of leeway for the for the MC’s to continue to make reasonably healthy marketing earnings alongside that our our call very clearly is that
If you look at the refining space if you look at the overall crude space there is a bit more tightness uh that we expect to come in the next 12 to 18 months than what is you know sort of reflected in the prices right now our sense is that
Demand growth for crude continues to be underestimated fairly consistently over the last decade by most forecasting agencies and invariably what happens is that once you start to play catch up and demand growth starts to exceed estimates you know there could be a little bit of uh tightness in prices coming in maybe
Over the latter half of next year and that’s something of course that will depend on how the the supply shapes up specifically from OPEC where there is increasing concern that you know the supply Cuts may not actually come about to the extent that they have been declared because compliance will become
An issue for some of the smaller opic Nations having said that overall our census crude will probably be in the range of around 81 80 to about $90 on with the bias probably on the upside at this point of time so to that extent uh you know uh for Upstream uh specifically
I think that is a fairly good range because even with windfall taxes being there net realizations have consistently remained at75 to $77 and that is still much higher than their last 8 to nine year averages so as I said uh crude prices and grms probably would be two
Key monitores as far as gas is concerned I think even in this year what we have really seen is that with winter probably being slightly normal uh you know the inventory build up in Europe has been so strong that even without any Russian gas supply uh even in this year the spike in
LG prices has actually been far less than what you would have expected spot L prices if you really look at it uh spiked to about 177 to $18 in October they’ve they’ve you know sort of been driven back down to about $15 so that again is is fairly good news from gas
Consumption and margin standpoint because what the what the lower what the slightly lower crude also does is that even term prices if you factor in the fact that they are at roughly about 133% linkage to crude those have also sort of softened by about1 half dollar and that is a fairly significant significant
Delta particularly from the cgd standpoint and overall gas demand standpoint every dollar decrease in gas costs improves gross margins by anywhere between one and a half to two and a half rupees per sem for the CDs and I think you know if not pass on of course and
You know the lower uh gas cost also uh you know should allow for slightly higher gas demand which is good news for a player like Gil for example so so so things from a macro standpoint actually look fairly healthy obviously anything can you know happen given that the Russia Ukraine conflict remains
Uncertain now there are concerns that it is spreading towards the Red Sea and disrupting uh shipping Freights we don’t know how much us production will grow uh you know after the stunning grad that we have seen in this year so there’s lots of questions but based on you know the
Data that we have right now and from what we can see I think the next 12 months should be fairly strong for the entire space um uh rebble hi season greetings uh and it’s interesting that you mentioned that so let’s for a second leave out geopolitics because you know
No one can predict what might happen tomorrow in the SZ uh but given everything else that you said from an investor standpoint if I want to add you know a couple of energy names to the portfolio for 2024 then what should I be looking at City Gas Distribution as you said
Because there’s probably a margin de playing out there should I go with you know Reliance for for a second if we just look at the O in gas side of the you know of the business over there could Reliance be a big play what should
Be the the top must haves in the energy complex in the portfolio in the next year so what we have been basically looking at I think if I look at across let’s say starting with Upstream we would be definitely positive on both OMC and oil India for different reasons uh
As I said realizations continue to be strong and after a long period of delay the the kg Bas in asset from OMC does look like it’s closer to commissioning now uh sometime in the you know in in in January full-fledged startup should happen and that will reverse the last
Sevene trajectory of production decline oil India also is showing a healthy growth in production they have put in place fairly aggressive targets for growing both oil and gas production over the next three to four years so and of course they benefit from the fact that NRL which is also doing an expansion of
Its in capacity in a fairly reasonably strong grm environment that adds to the Consolidated group earnings in a major way so to that extent I think oil India also looks good in Downstream hpcl you know is probably one that I would look at they are expanding their refining portfolio significantly they’re adding
To their petrochemical capacity which you know changes the margins mix quite significantly as well as changing the scope and scale of the business leverage continues to remain comfortable and even if you build in Fairly normalized marketing margins my sense is that earnings for 25 and 26 will continue to
See upgrades the way that fi 24 earnings have seen upgrades across the street in the last two months and valuations remain at less than four times one year forward earnings which is I think a fairly reasonable level enter the story as far as um gas space is concerned we
Would probably play Gil and mgl as the two players I think for Gale the rising gas demand as I just mentioned along with the softening of of LG prices is probably a significant Delta for earnings across segments and NGL is one name that stands out in my mind in cgd excuse me in
Cgds because there is sustained margin strength uh steady volume growth that is in Prospect and any Improvement in gas cost even from here should add to the margin profile so those are the five six names Reliance yes the the the OTC segment obviously should should benefit if refining continues to stay strong
Uh fair enough so omgc oil Gale mgl uh and as well hbcl of course in the oil marketing P PR thank you very much great speaking with you appreciate you joining in with that quick chat on the oil and gas space now 90
