5 Stocks To Buy From The Oil And Gas Sector For Up To 40% Returns

Broking firm Sharekhan is betting on several stocks from the oil and gas sector and sees the possibility of a sharp increase in prices of some of these stocks.

Here are 5 stocks from the oil and gas sector where broking firm Sharekhan has a buy call.

Company name	Current market price	Target price
Petronet LNG	200	285
Mahanagar Gas	826	1000
GSPL	283	410
IOC	126	150
BPCL	386	520

City gas distribution (CGDs) and gas utilities

According to Sharekhan one can expect q-o-q margin recovery for CGDs but still remain weak; "GAIL's earnings to grow strongly led by higher LPG/spot LNG price. We expect earnings of Indraprashtha Gas, Mahanagar Gas and Gujarat Gas to improve sequentially, as price hike is expected to help margin recovery, while volume is expected to largely remain stable on a sequential basis but increase sharply for Indraprashtha Gas, Mahanagar Gas by 13%/14.5% y-o-y.

"Although margin would recover on a q-o-q basis, it is expected to remain well below Q4FY2021 due to high gas cost and lower allocation of APM gas and, thus, y-o-y earnings of CGDs would remain weak. Among gas utilities, GAIL is expected to report robust 74% y-o-y PAT growth, led by sharp rise in profitability of gas marketing segment because of higher spot LNG prices and higher realisation in LPG-LHC business. GSPL is expected to report largely stable earnings sequentially, as volume is likely to remain flat sequentially," the brokerage has said.

Steep correction in stock price of city gas distribution players

According to Sharekhan steep correction in the stock prices of city gas distribution players makes valuation attractive for IGL/MGL/Gujarat Gas, but margin pressure would continue for IGL/MGL/Gujarat Gas in FY2023, given expectation of further hike in domestic gas price (post recent doubling of domestic gas prices from April 2022) and elevated level of spot LNG price due to geopolitical concerns.

"We prefer Oil India among upstream PSUs as it is a play on both improving oil and gas realisation and recovery in refining margin (holds 70% stake in Numaligarh Refinery). We prefer Reliance Industries among downstream players given a cyclical gross refining margin recovery; and likely further value unlocking in digital and retail businesses would add to shareholders' returns in the coming years. We prefer GAIL and GSPL among gas utilities, as they are a play on rising domestic gas demand and are available at attractive valuations," the brokerage has said.

Oil marketing companies to see weak earnings

According to Sharekhan it is expected that muted marketing margin will offset robust GRM recovery and inventory gain.

"We expect earnings of OMCs (IOCL, BPCL, and HPCL) to decline sharply on both y-o-y and q-o-q basis due to weak marketing margin on auto fuels (no petrol/diesel price hike in Q4FY2022 due to several state elections). We expect negative marketing EBITDA, which would offset the benefit of strong GRM (expect IOCL/BPCL/HPCL GRM at $12/$11.5/$11.5 per bbl) as Singapore complex GRM rose 30% q-o-q to $7.9/bbl, led by higher petroleum product cracks. Overall, we expect IOCL/BPCL/HPCL to report 53%/56%/79% y-o-y decline in PAT in Q4FY2022. For RIL, we expect PAT to increase by 43%/8% y-o-y/q-o-q to Rs. 16,963 crore, led by 1) strong growth in standalone, driven by higher GRM, 2) benefit of higher ARPU for Jio, and 3) sustained strong growth in retail EBITDA driven by higher footfalls," the brokerage has said.