The oil and gas sector is in focus today. Global energy markets continue to react to supply geopolitical tension and shifting trade flows. Additionally, the Indian government’s measures on royalty rates for key oil and gas operators along with exempting petrol containing ethanol from excise keeps the sector in spotlight. The key question is what’s the right strategy for the sector now?
The brokerage house Nomura, in its latest report, noted that these market conditions are creating opportunities for select companies across India’s oil and gas space. The brokerage believes refiners are benefiting from strong fuel cracks, while city gas distributors are seeing improving demand dynamics and lower risks to profitability.
Among the Oil Marketing Companies (OMCs), Nomura currently prefers Indian Oil Corporation (IOCL). The Japanese brokerage house cited stronger refining economics and relatively better positioning compared with its peers.
Nomura’s key oil and gas picks: Why IOC tops Nomura’s list
Indian Oil Corporation or IOC remains Nomura’s preferred pick among the oil marketing companies under its coverage.
Nomura stated that it prefers “refiners like IOC” as it expects robust refining margins to continue in the near term. The brokerage also believes the company could be “the least impacted by marketing under-recoveries among our covered OMCs.”
The report noted that several recent developments have helped improve profitability across the sector. These include fuel price hikes, excise duty adjustments, lower crude oil prices compared with earlier peaks and the impact of Special Additional Excise Duty (SAED) on petroleum product exports.
Nomura added, “Oil Marketing Companies (OMCs) have seen a sharp turnaround of their integrated margins.”
Nomura estimates integrated margins for “IOCL (Buy)/BPCL (Buy)/HPCL (Neutral) at $8.3/6.8/0.8 per barrel at current prices.”
The brokerage further noted that “IOC is positioned more favourably vs the other OMCs in our coverage universe.”
While Bharat Petroleum Corporation (BPCL) has also benefited from improving refining and marketing conditions, Hindustan Petroleum Corporation (HPCL) is currently estimated to have a much lower integrated margin profile.
As per Nomura report, this gap in profitability is one of the reasons IOCL remains the preferred stock among the three major state-owned oil marketing companies.
Why refining margins have remained strong
A major theme highlighted by Nomura is the continued strength in diesel and aviation turbine fuel margins.
Nomura in its report added, “Diesel and ATF cracks have remained healthy since the start of the West Asia conflict.”
The brokerage noted that diesel cracks are currently tracking around USD 50 per barrel, while aviation turbine fuel cracks remain close to USD 54 per barrel. Before the conflict, these margins typically ranged between USD 15 and USD 20 per barrel.
According to Nomura, this sharp increase has been driven by multiple global supply disruptions. Refinery shutdowns caused by crude shortages and infrastructure damage from drone and missile attacks have affected fuel production in several regions. In addition, many Asian refiners have shifted towards processing lighter crude grades because of shortages of medium and heavy crude supplies from the Middle East.
The report also highlighted that countries such as China and Russia have reduced exports of petroleum products, further tightening global supply and supporting refining margins.
City gas distributors
Nomura also sees value in India’s City Gas Distribution (CGD) companies.
The brokerage believes recent gas price hikes have significantly reduced risks to profitability for the sector.
According to the report, “Q1 could be the bottom in terms of CGD margins.”
Nomura expects demand growth to remain healthy due to multiple factors. Industrial consumers continue to find natural gas attractive as alternative fuels become more expensive and less available. At the same time, government efforts to increase domestic gas consumption are supporting demand.
The brokerage also expects Compressed Natural Gas (CNG) demand to remain resilient because of its cost advantage compared with petrol and diesel.
Among city gas distributors, Nomura prefers “Mahanagar Gas (Buy) and Gujarat Gas (Buy),” with potential upside estimates of 35% and 30%, respectively.
What investors need to know
According to Nomura, the outlook for India’s oil and gas sector remains closely linked to refining margins, fuel demand trends and government policy decisions.
According to the brokerage report, IOCL remains its preferred pick among oil marketing companies, while Mahanagar Gas and Gujarat Gas continue to be its preferred names in the city gas distribution segment.
Disclaimer: This article contains compiled brokerage views and specific stock evaluations, which are for informational purposes only and do not constitute financial advice, an offer, or solicitation. Readers are advised to consult a SEBI-registered financial advisor before making any investment decisions, as energy market dynamics, refining margins, and regulatory policies carry inherent financial risks. This disclaimer has been generated using AI to support user well-being and responsible content consumption.
