Looking beyond benefits of crude price rally

Brent crude price has spiked 12% to $74 a barrel on escalating Israel-Iran tensions. This is troublesome for India’s macroeconomic position as the country is a net importer of fuel. But at the micro-level, there could be some potential beneficiaries of elevated crude oil prices. These are Oil and Natural Gas Corp., Oil India Ltd, Reliance Industries Ltd and Vedanta Ltd. Among these, upstream oil & gas producers Oil India and ONGC can be considered as pure plays on crude oil price movement, as the others are conglomerates.

Between the two, Oil India seems to be on a better footing. ONGC has exposure to oil marketing through its subsidiary HPCL Ltd. So, its consolidated financials could suffer if the marketing business of HPCL is adversely affected by subsidized fuel prices. One may argue that ONGC is being valued on a sum-of-the-parts (SOTP) basis with separate valuation ascribed to HPCL, but the risk of a merger in the future looms. On the other hand, Oil India has nearly 70% stake in the Numaligarh refinery with no presence in marketing. Oil India’s consolidated financials can also benefit from the higher refining margins of Numaligarh. A further rise in crude prices could boost the earnings of Oil India, provided the government does not reintroduce the windfall tax, which was removed in December 2024.

Volume growth cushion

Now, what if recent gains in crude prices evaporate as geopolitical tensions de-escalate? In that scenario, Oil India’s robust volume growth prospects are expected to act as a cushion, provided they see a meaningful improvement. The Oil India stock has slid 37% from its 52-week high of ₹767.90 in August 2024 due to disappointing earnings. In Q1FY25, Oil India saw a 17% year-on-year rise in total oil and oil equivalent gas (Oil + OEG) at 1.51mt (million tonnes). However, volume growth in subsequent quarters stagnated. For FY25, the reading was at an unimpressive 4%. But the management has reiterated its guidance for production of 4mt of oil and 5bcm (billion cubic metres) of gas by FY28. In terms of Oil + OEG, it comes to 8.3mt (assuming 1bcm of gas equals to 0.86mt of crude oil). If achieved, it would be 24% higher than the output of 6.71 million tonnes in FY25.

The gas production target of 5bcm is contingent on the evacuation facilities because even if production is achieved, it has to be connected to the pipeline for transporting it to the customer. Else, the produced gas gets wasted. But the management is confident of meeting a couple of deadlines for the evacuation. The first is the replacement and upgrade of the pipeline to the Numaligarh refinery to be commissioned by October 2025, ensuring a stable natural gas feed for the refinery. The second is participation in the Indradhanush Gas Grid that will connect Oil India’s gas fields in the northeast to the national network by March 2027.

Plus, there could be upside in gas realization for Oil India. The APM gas realization was $6.5 per mmbtu in FY25. Though the gas price is $6.75 in the current year, the company will also get a premium of 20% applicable to gas production from new wells, which would mean realization moving up closer to $7. Meanwhile, Oil India’s stake in the Numaligarh refinery is valued at about ₹50 per share. If the value per share of Numaligarh is deducted from Oil India’s stock price, it is quoting at 9x of FY26 standalone earnings per share according to Bloomberg, which may not be expensive, but production growth remains a crucial trigger.

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