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Stocks of state-owned Oil and Natural Gas Corp, and Bharat Petroleum Corp are likely to surge next week while those of index heavyweight Reliance Industries may hold on to gains due to bullishness in the market. Stocks of refining-cum-marketing companies such as Hindustan Petroleum Corp, and Indian Oil Corp are also expected to remain firm as the rupee has strengthened against the US dollar.
The rupee closed at 54.2600 a dollar on friday, up sharply from 55.7300 a dollar Monday. State-owned oil refiners meet more than 75% of their crude oil requirements through imports. Strength in the rupee lowers the price at which they buy crude oil. Monday, ONGC said it had signed an agreement with US energy major ConocoPhillips to buy its 8.4% stake in the Kashagan oilfield in Kazakhstan for $5 bln.
We find the acquisition favourable for ONGC as it entails limited project risk, provides stability to (arm) OVL's (ONGC Videsh) falling production profile, is at reasonable valuations, and reduces risks of a higher subsidy burden. ONGC shares have gained 4.3% since Monday, when the agreement was announced. We believe such acquisitions will use the company's available free cash flow and make a stronger case for lower subsidy burden in (the) future.
Another big gainer this week was BPCL, which has outperformed peers HPCL and Indian Oil due to the valuations of its exploration and production business. Reliance Industries shares have gained 2.6% this week. We see the company's refining business doing well going forward as higher demand for various petroleum products will lead to better margins.
Post revisiting our global refining model, we reiterate our positive stance on refining noting that net refining capacity addition will lag demand growth. Also, low distillate inventories pose upside risks to margins.
