Why Morgan Stanley Is 'More Bullish' On India's Energy Producers

Morgan Stanley is 'more bullish' about India's energy sector because its energy producers are increasing output while their peers around the world are cutting back.

Adding to this, commodity prices remain higher and government policies keep hydrocarbon pricing in India closer to market prices as subsidies unwind, the brokerage said.

If the Organisation of the Petroleum Exporting Countries, or OPEC, continues production at its current rates, global crude oil inventories are likely to decline by 0.8 million barrels per day in the calendar year 2024, according to Nomura. The inventory drawdowns are likely to rise to about two million barrels per day in the second half of calendar year 2023 if OPEC fails to increase output from current levels, it said.

"The government's assistance to energy producers is underappreciated, and the capital return story is very appealing," Morgan Stanley said. 

Oil and Natural Gas Corporation Ltd. and Oil India Ltd. are on the cusp of an inflection in earnings quality and returns, according to the brokerage. Both companies have returned more cash than their current market capitalisation since 2008, making them attractive as the brokerage expects their average selling prices to double this decade.

"We forecast ONGC and Oil India to have 2-5% production growth as well as significant upside in their downstream fuel businesses in 2023," Morgan Stanley said in their Feb. 21 investor note. Their dividend yields of 8–12%, the brokerage said, are among the top quartile as compared to their global peers.

• Keeps its 'overweight' rating and raises its price target to Rs 199 per share from Rs 177 apiece.

• Raises net oil realisations.

• Believes that the government will keep hydrocarbon prices in India closer to market prices.

• Increasing hydrocarbon production and recovering downstream profitability are also key to earnings.

• Expects dividend yields to continue to remain healthy.

• Believes domestic gas prices should be sustained at higher levels after a global gas glut over the past five years kept them low.

• Expects gas to account for 52% of the company's domestic hydrocarbon production and 47% of its consolidated production by fiscal 2024.

• ONGC slowly raising domestic gas output should restore earnings to 2018 levels after multiple years of declines.

• It should negate volume growth challenges.

• Windfall taxes and an ad hoc approach in the policy framework are key challenges for earnings quality.

• Keeps 'overweight' rating and raises the price target to Rs 323 from Rs 253 per share.

• Raises assumptions on net oil realisations and volume growth.

• Expect the company's return ratios to remain strong.

• Supply tightness in upstream oil and gas markets to support realisations.

• The refining margins of Numaligarh Refinery will benefit from permanent refinery shutdowns, limited refinery capacity additions or delays, and a recovery in jet fuel demand.

• Downstream operations to contribute about 25-30% of consolidated operating profit

• Sees a CAGR of about 5% in hydrocarbon production over the next two years from existing fields.

Morgan Stanley, on the other hand, has downgraded Hindustan Petroleum Corporation Ltd. to "equal weight," citing the company's lower diesel production versus sales, lower utilisation rates, and higher net debt. It has also lowered the price target to Rs 254 from Rs 280 apiece.

The company is also investing in greenfield and brownfield refinery capacity additions or expansions, which will lead to elevated debt levels and lower refinery utilisation rates, the brokerage said. Adding to this, rising oil prices without any changes in retail fuel prices could lead to a decline in intergrated margins, it said.

Citing media reports, Nomura said that oil marketing companies are in discussions with the government to raise auto fuel prices given significant under-recoveries of over Rs 1 lakh crore in the first nine months of fiscal 2023.

Despite these losses, Nomura sees the probability of a price hike as very low in the current market scenario. "However, in the off-chance that the OMCs are allowed to raise prices for auto fuels, it would be a material positive," it said.

Indian Oil Corporation Ltd., Bharat Petroleum Corporation Ltd. and Hindustan Petroleum Corporation Ltd. will have to bear an under-recovery of Rs 5,000 crore on the sale of auto fuels in the fourth quarter of fiscal 2023, the brokerage said.

Nomura anticipates that oil prices will remain high in fiscal year 2024, owing to "robust global oil demand growth from China and other Asian countries, a constrained supply situation, and low global oil inventory levels."