After weeks of escalating tensions and a seesaw political game in the Middle East, Iran and the US have finally agreed to a peace deal that will likely open up the Strait of Hormuz this week and bring much-needed relief to oil prices. Amid the renewed optimism, Nomura expects oil marketing companies (OMCs), city gas distributors (CGDs), and Petronet LNG to benefit the most.
Oil prices have already declined sharply amid the developments. Brent crude futures have fallen below $83 per barrel, after soaring above $120 per barrel earlier this year. "We believe oil prices have already priced in part of the de-escalation over recent weeks as ceasefire talks progressed. Also, since the actual reopening of the Strait of Hormuz may still be 30 days away, no immediate changes are expected in terms of physical flow of oil over the next 30 days. In the near term, once oil flows through the Strait of Hormuz normalise, we expect oil prices to continue to grind lower as the war risk premium fully unwinds,” according to Nomura.
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Oil prices to drop below $70 per barrel?
The brokerage believes that oil prices could drop below $70 per barrel over the next few months if the peace deal holds through the signing and initial implementation. In the medium to longer term, it expects oil prices to soften further if sanctions on Iran are lifted and supplies from Iran potentially re-enter the market. Also, OPEC+ raising production quotas during the crisis could result in a further increase in the rate of oil flows from the Middle East.
Nomura has a ‘Buy’ rating on the shares of BPCL and IOC, with target prices of Rs 365 apiece and Rs 180 apiece, implying upside potential of 18% and 25% respectively. For HPCL, the brokerage has a ‘Neutral’ call and a target price of Rs 440 apiece, implying an upside potential of nearly 10%.
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Peace deal impact on Petronet LNG
Nomura also has a ‘Buy’ rating for the shares of Petronet LNG, with a target price of Rs 345 apiece. This implies an upside potential of nearly 21% from the stock’s previous closing price. It explained that the key triggers for the stock could come from the opening up of the Strait of Hormuz, a sharp drop in spot LNG prices, offtake contracts on its expanded 5 mtpa capacity, and commissioning of the Bengaluru-Kochi pipeline.
Peace deal impact on Gujarat Gas, MGL
Mahanagar Gas (MGL) could benefit the most as it has 1.5 mmscmd of contracted HH-linked volume, which is the cheapest cost imported gas currently, Nomura highlighted, while noting that margins of city gas distributors are very sensitive to input cost and even a 5% reduction in input gas cost could result in a 28-38% increase in EBITDA margins.
Among the CGDs under its coverage, Nomura prefers Mahanagar Gas and Gujarat Gas, and has a ‘Buy’ call on both stocks as it sees potential upside of 26% and 28% respectively. However, for Gujarat Gas, it said that industrial volume could be under risk once propane availability improves.
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Peace deal impact on GAIL
The impact on GAIL will likely be moderately positive, as the upside from increased transmission volume will likely be partly offset by lower marketing margins and reduced margins on LPG production as the import parity price of LPG could come down, it added.
“With increased gas imports, we will likely see an increase in transmission and marketing volumes for GAIL. However, given the fixed tariff structure of the gas transmission business, the EBITDA impact will likely be limited to volume increase. The gas marketing segment may see a negative impact from lower marketing margins as the spread between HH-linked LNG and spot LNG gets contracted. Also, potentially lower Saudi propane prices could impact the company’s margin for the LPG production business negatively,” according to Nomura.
The brokerage has a ‘Buy’ call on the shares of GAIL with a target price of Rs 195 apiece, implying an upside potential of more than 11% from the stock’s previous closing price.
Peace deal impact on Reliance Industries, ONGC and Oil India
On the other hand, the international brokerage sees upstream companies like ONGC and Oil India facing the maximum negative impact due to lower realisation on both oil and gas.
For heavyweight Reliance Industries (RIL), Nomura sees the peace deal having a moderate negative impact due to lower refining GRMs as nearly 3 mbpd of Middle East refining capacity may come back online. “We believe this will be partly offset by the higher volume of off-gas available for the company’s petrochemical plants, as the government may relax the gas pooling mechanism,” it added.
Nomura has a ‘Buy’ call on the shares of RIL, with a target price of Rs 1,640 apiece. This implies an upside potential of more than 25% from the stock’s previous closing price. It has a ‘Neutral’ call for the shares of ONGC and Oil India, with target prices of Rs 295 and Rs 490 respectively.
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(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)
