Oil marketers to shine while gas distributors may face margin challenges in third quarter

Oil marketers to shine while gas distributors may face margin challenges in third quarter

The oil and gas sector is expected to see mixed results in the October-December 2024 quarter. Oil marketing companies (OMCs) may outperform, while city gas distributors (CGDs) could face margin pressures.

Stable refining margins and strong auto fuel demand position OMCs for a strong quarter. Hindustan Petroleum Corporation (HPCL) is set to post solid growth, helped by a weak base from last year, while Indian Oil Corporation (IOC) may see tempered performance due to a high base effect. Downstream operations are expected to drive growth for the sector.

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Upstream players such as Oil and Natural Gas Corporation (ONGC) and Oil India are likely to report modest 6-8% year-on-year (YoY) EBITDA growth. However, weak volume growth and minimal impact from the removal of windfall taxes could limit their upside.

However, unexpected cuts in Administered Price Mechanism (APM) gas prices are likely to hurt CGDs like Indraprastha Gas (IGL) and Mahanagar Gas (MGL).

Analysts expect earnings before interest, tax, depreciation, and amortisation (EBITDA) for IGL and MGL to drop sequentially by 37% and 24%, respectively. However, Gujarat Gas, may partially offset margin pressures with 12% industrial volume growth during the quarter.

GAIL’s EBITDA is projected to decline by 7% sequentially, driven by weak performance in its marketing and petrochemical segments. However, strong liquified petroleum gas (LPG) performance could provide some support.

Petronet LNG is expected to see flat volumes, though marketing gains may offer a positive surprise. Gujarat State Petronet (GSPL) is projected to report a 7% decline in EBITDA due to lower volumes and rising costs.

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Key points to watch

Market analysts will closely monitor volume and margin strategies for CGDs, particularly any potential price hike announcements. Updates on project progress for ONGC, HPCL, and GAIL will also be crucial.

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Dayanand Mittal, Oil and Gas Research Analyst, JM Financial Institutional Securities prefers Gujarat Gas amongst all the city gas companies.

He has a negative view on CGD companies like IGL and MGL due to declining APM gas allocation from ONGC and Oil India.

The government is gradually shifting to new well gas priced at around $9 per metric million British thermal unit (MMBtu), reducing APM allocation by 7-10% annually. This will require CGD companies to raise compressed natural gas (CNG) prices by ₹2-3 per kg, diminishing CNG’s cost advantage over petrol and diesel. While recent relief measures are positive, structural challenges continue to weigh on the long-term outlook for these companies.

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