Refining boost isn't enough; Nuvama turns selective on Oil & Gas for FY26

Nuvama on oil & gas sector: Domestic brokerage Nuvama has turned distinctly selective on India’s oil and gas (O&G) sector, cautioning that strong refining margins may no longer be enough to offset emerging pressures across upstream, midstream, and city gas players. 

 

The brokerage expects the divergence between refiners and the rest of the value chain to widen in the coming quarters, prompting a switch trade into Reliance Industries (RIL) and Petronet LNG (PLNG), while avoiding ONGC, oil marketing companies (OMCs), GAIL and city gas distributors (CGDs).

 

According to Nuvama, the outlook for OMCs is clouded by high capital expenditure commitments and rising under-recoveries, which are set to keep return ratios suppressed. CGD stocks may face valuation derating as regulatory uncertainty increases following ad-hoc policy moves, while GAIL continues to struggle with muted gas demand, weak petrochemical dynamics, and margin volatility. ONGC, meanwhile, carries execution risk after seven consecutive years of disappointing production delivery.

 

These concerns overshadow an otherwise steady Q2 reporting season, where sector Ebitda grew 33 per cent year-on-year (Y-o-Y), largely powered by exceptional refining performance.

Q2FY26 Review: Refiners shine, others falter

 

RIL remained the standout, posting an 18 per cent Y-o-Y rise in consolidated Ebitda with robust momentum across O2C (+21 per cent), Digital (+17 per cent) and Retail (+16 per cent), even as upstream earnings fell 5 per cent. OMCs delivered another strong quarter as their Ebitda surged 1.7x Y-o-Y supported by a $5-9 per bbl expansion in gross refining margins, though diesel retail margins fell 19 per cent.

 

The rest of the sector faced broad pressures. ONGC’s standalone EbitdaX slipped 3 per cent Y-o-Y due to lower Brent-linked realisations and a 23 per cent jump in opex. CGDs saw Ebitda fall 16 per cent Y-o-Y after APM gas deallocation eroded margins. GAIL reported a 15 per cent Y-o-Y drop on the back of weak petchem spreads and contraction in LPG/LHC margins. PLNG’s Ebitda fell 7 per cent Y-o-Y due to a 5 per cent decline in regasification volumes.

Management Commentary: Subsidy flow, Guidance cuts

 

The government’s plan to release ₹30,000 crore of LPG subsidies in 12 monthly instalments from November 2025 offers near-term liquidity relief for OMCs. However, Nuvama noted that the subsidy will cover barely 56 per cent of cumulative under-recoveries, and the gap is likely to widen as winter elevates LPG prices.

 

Further, ONGC cut its FY26 oil and gas production guidance as peak output at KG-98/2 slips to FY27. GAIL reduced its FY26-27 transmission volume forecast by 1-4 per cent amid subdued demand. CGD commentary remained mixed. IGL expects gas costs to fall, while MGL cut its full-year Ebitda/scm outlook.

 

Given this scenario, analysts at Nuvama advise sticking with RIL and PLNG, its preferred structural plays in an increasingly uneven sector landscape.