Analysts recommend buying these Oil & Gas stocks; see upside of up to 21%

Shares of oil marketing companies such as HPCL, BPCL and IOCL have corrected 9-18 per cent since mid-Feb as the gross marketing margins on petrol and diesel have declined to an average of Rs 2.3 to Rs 0.2 per litre in April 2024 from an average of Rs 8.0 to Rs 3.4 per litre in the fourth quarter of financial year 2023-24 (FY24), said those at Motilal Oswal. 

Analysts at Motilal Oswal believe that the current weakness in marketing margins is largely attributable to geopolitical headwinds, ongoing refining capacity maintenance, and elevated freight rates for oil transportation. 

The brokerage expects marketing margins to normalise at higher levels from quarter two of financial year 2024-25 (FY25) onwards as the impact of these events subside.

That said, there are recent risks too for OMCs, as oil price volatility remains a risk to earnings, analysts highlight that the current oil prices have built in a premium of up to $2 per bbl due to the Red Sea crisis. This is due to rising freight rates from 60-100 per cent as the ships are forced to sail around the Cape of Good Hope, analysts said. 

As impact of geopolitical headwinds wanes, the brokerage expects marketing margins to recover and come closer to its assumption of Rs 3.3 per litre.

Buzzing stocks

Analysts at Motilal Oswal have given a ‘Buy’ call for HPCL with a target price of Rs 590, an upside of 21 per cent on the current market price (CMP) of Rs 487 as on April 18. They believe that the company’s valuation has limited room for correction and it is set to deliver a return on equity of 10 per cent in FY25. The brokerage is bullish on the stock as the company is increasing its refining capacities. 

They also recommended buying IOCL with a target price of Rs 195, an upside of 14.7 per cent on the CMP of Rs 170 as on April 18. Motilal Oswal expects IOCL to generate a 13 per cent RoE in FY25 on normalised marketing margins of Rs 3.3 per litre. The company is also set to add 20 per cent refining capacity between FY24 and FY27. 

Further, the brokerage has recommended buying ONGC and GAIL with a target price of Rs 315 against a CMP of Rs 276 and Rs 215 against a CMP of Rs 205, respectively. 

Moreover, analysts at the brokerage reiterated their 'Buy' call for Mahanagar Gas at a target price of Rs 1,665 in its latest report while it remained ‘Neutral’ on BPCL.

The Nifty Oil and Gas is presently trading at a price to earnings multiple of 9.6 times. This is below its 2 year average of 11.56 times.