Oil/Gas Share Market

Indian oil & gas sector has seen an eventful FY13 with hoards of announcements by companies and plenty of changes accorded by the government. While some companies have gained out of these, there are few who have borne the pain as well. External factors such as crude price movements, exchange rate fluctuations, sanctions on Iran, Euro Zone debt crisis and many more have played their part in increasing the volatility.

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Market Size

Our top picks include Cairn India (best proxy on crude prices, cheap valuations), Oil India (strong production growth, play on reforms, huge cash balance), ONGC (relative under valuation to global peers, play on reforms), BPCL (huge upstream value, less sensitive to vagaries of subsidy sharing), Petronet LNG (rising domestic gas demand, expectations of weak LNG prices) and GSPL (long term growth in gas supplies, attractive valuations). We have assigned Market Performer rating to Reliance Industries (core business of refining & petrochemicals still under pressure, KG-D6 volumes continue to fall), GAIL (risk to earnings from regulations, fall in petrochemical profitability if gas prices are raised), HPCL (high risk to earnings from subsidy sharing mechanism, high leverage) and IOC (limited upside potential).

LOOKING FORWARD

India Ratings & Research has a stable outlook on both public and private sector oil and gas companies for 2014-15. The agency expects public sector companies to maintain strong linkages with the government. The existing ratings of private sector oil and gas companies have sufficient headroom to withstand the impact of muted global growth and further moderation in refining margins, it says.

FACTORS TO WATCH

The sector is highly regulated. Hence, before investing, one should look at regulatory aspects that have the potential to impact the business. One should also look at capacity addition and production plans as profits in this commoditydriven business depend to a large extent upon volumes.

"In case of downstream (refining & marketing) businesses, keep an eye on under-recoveries, as these can be huge, delayed payment for underrecoveries by the government and working capital position. These are inherent in the business model and, hence, one needs to be cautious, especially with public sector companies."





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