Oil & gas index at a nine-year peak

oil, crude
The BSE Oil & Gas index continued to rise in the first week of 2017, gaining 3.4 per cent to reach its highest level in nine years.

The index surged 25 per cent in the second half of last year, even as the benchmark indices remained flat during that period. A rally of up to 50 per cent in stocks such as Indraprastha Gas, Indian Oil Corporation (IOC), Hindustan Petroleum Corporation Ltd (HPCL) and Oil and Natural Gas Corporation (ONGC) in the past six months has led the gains, supported by a global rally in oil prices following the decision of oil-producing countries to keep the output low.

Analysts are anticipating that oil companies will report strong earnings, led by inventory gains and a recovery in margins, in the December quarter.  Nomura analysts Anil Sharma and Ravi Adukia say oil-marketing companies (OMCs) will surprise in the December quarter. 

“On our estimates 9MFY17 (the first nine-month period of 2016-17) earnings will account for 89 per cent, 97 per cent, and 120 per cent of BPCL, HPCL and IOC's consensus 2016-17 estimated earnings. We think consensus earnings upgrades will continue with largest upgrades for IOC. We remain positive on OMCs,” a report authored by Sharma and Adukia said.

The Brent crude oil price has increased an average of 15 per cent year-on-year to more than $50 a barrel in the December quarter, which will result in huge inventory gains, analysts say.

“In rising crude oil environment, with refiners having 15 days to one-month stock, they register inventory gains. These gains coupled with strong trend in crack spreads will result in higher gross refining margins (GRMs) for OMCs during Q3FY17,” say analysts at IIFL Wealth Asset Management in a report. OMCs had posted a strong showing in the June quarter, but their performance took a hit in July-September due to inventory losses and weakness in GRMs. 

Sudeep Anand, analyst at IDBI Capital, expects “significant inventory gains for both upstream and downstream companies”. The brokerage house’s most preferred picks include Gail, ONGC and Reliance Industries. Meanwhile, in the OMC space Nomura is most bullish on IOC, followed by HPCL and BPCL. 

However, the hefty earnings in recent months mean diminishing chances of upside gains, say analysts. 

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