Time to Bet on these 3 Stocks as Crude Oil Prices Rise?

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  • Mar 4, 2022 - Time to Bet on these 3 Stocks as Crude Oil Prices Rise?

Time to Bet on these 3 Stocks as Crude Oil Prices Rise?

Mar 4, 2022

Time to Bet on these 3 Stocks as Crude Oil Prices Rise?

Anyone who has lately bought groceries, paid rent, or filled the tank of their car has faced inflation.

The prices of everyday essentials have been steadily rising for almost a year owing to hikes in fuel prices, supply-chain constraints and global shortages of products.

In the last few weeks, fuel costs have increased remarkably across India. A litre of petrol costs Rs 109.98 in Mumbai, while diesel rates stand at Rs 94.14 per litre.

The price of edible oil is also escalating.

The primary reason behind the rising prices of consumer products is crude oil.

In the wake of the Ukraine-Russia crisis, crude oil continues to be on the boil. it extended gains above US$100 on supply-related concerns as tensions escalated between Russia and Ukraine.

On Thursday, brent crude futures touched almost US$120 per barrel, the highest intraday level seen in nearly a decade. Following Russia's attack on Ukraine, the benchmark oil contract entered three digits last week.

According to reports, India, which imports more than 80% of its crude oil, is expected to almost double its import bill to more than US$100 bn by the end of the financial year 2021-2022.

Oil prices are expected to become extremely volatile. So investors should be careful before taking any position in any company related directly or indirectly to the oil & gas industry.

Here's the list of stocks set to benefit as crude oil prices hit the roof.

1. Oil India

Oil India (OIL) is engaged in exploration, development and production of crude oil and natural gas, transportation of crude oil and production of liquefied petroleum gas (LPG). It also provides various exploration and production (E&P) related services for oil blocks.

For the December 2022 quarter, Oil India reported 37% jump in net profit as it benefitted from a rise in international oil prices. The state-owned company's net profit stood at Rs 12.4 bn for the third quarter compared to Rs 9 bn a year back.

The firm's natural gas production rose 18% to 0.8 bn cubic meters in December quarter, crude oil production was almost unchanged at 0.8 million tonne.

The board of OIL declared a second interim dividend of Rs 5.75 per share for 2021-22 which resulted in total interim dividend till date of Rs 9.25 per share for the fiscal year.

Oil India is poised to benefit from an increase in the price of crude oil.

The current Russia-Ukraine war, which propelled global crude oil prices might lead to a bumper March quarter for India's oil and gas companies.

Even if crude oil or gas prices goes up by only US$1 a barrel, it will positively impact company's profit and valuations.

Also, the company is likely to gain from a cyclical improvement in refining margins as it holds 70% stake in Numaligarh Refinery (NRL). Last year in April, OIL and Numaligarh Refinery entered into a partnership.

In the last week, shares of Oil India have rallied up to 10% on the BSE. In the last six months, the company has outperformed the market, having surged by 39%.

chart

For more details, check out Oil India's financial fact sheet and quarterly results.

2. ONGC

The second stock on our list is Oil & Natural Gas Corporation (ONGC)

It's the largest government-owned-oil and gas exploration and production corporation in the country. It produces around 70% of India's crude oil. This is equivalent to around 57% of the country's total demand. It also produces around 84% of India's natural gas.

It's involved in exploring for and exploiting hydrocarbons in 26 sedimentary basins of India. It owns and operates over 11,000 km of pipelines in the country. Its international subsidiary ONGC Videsh currently has projects in 17 countries.

Presently, ONGC has stakes in three projects in Russia - 20% in Sakhalin, 26% in Vankorneft, and 100% in Imperial.

Recently, ONGC stated it does not expect any impact on operations in any of its Russian projects, and that ruble devaluation will likely increase its profit.

The company said it did not foresee any challenge in selling its share of crude from Russian oilfields or repatriating dividends from there in the current situation.

ONGC Videsh said,

  • Based on present applicable sanctions and removal of five Russian banks from SWIFT arrangement, the company does not foresee any challenge in selling crude oil or repatriating dividends except that scrutiny of financial transactions may be higher than usual.

Apart from this, ONGC also benefits from the rise in global natural gas prices given that a large share of the company's revenues are generated through sale of gas.

When the rates are revised in April, the increase in global natural gas prices is expected to result in a more than doubling of domestic prices.

In September 2021, the government had raised natural gas prices by 62% for the first time in two years tracking the rise in global natural gas prices.

ONGC's shares have gained 84% in the past one year, while in the last 5 days, share price of the company went up by 7%.

chart

For more details, check out ONGC's financial fact sheet and quarterly results.

3. GAIL India

GAIL India, a government of India undertaking, is an integrated natural gas company in India.

It owns over 11,500 km of natural gas pipelines, over 2,300 km of LPG pipelines, six LPG gas-processing units, and a petrochemicals facility.

It also has a joint-venture interest in Petronet LNG, Ratnagiri Gas and Power, and in the CGD business in several cities.

GAIL has wholly owned subsidiaries in Singapore and the US for expanding its presence outside India in the segments of LNG, petrochemical trading, and shale gas assets.

Through its initiative 'Pankh', GAIL has started investing in start-ups operating in focus areas, which includes natural gas, petrochemicals, energy, project management, bio-manure marketing, nano materials, IoT, data mining, environment, health, and social.

That apart, GAIL India is unlikely to be affected by potential supply outages and sanctions, despite Russia's Gazprom providing around 10% of its LNG consumption.

According to market participants, there's a potential opportunity for the Indian company to sell its LNG from the US in the European market, given that European economies rely on Russian supply for about 57% of their gas needs.

Last month, GAIL India pre-poned the supply of gas from the US and is looking to contract more LNG next year as it doubles down efforts to secure affordable energy supplies to meet the needs of Asia's third-largest economy.

GAIL reported its higher quarterly net profit in three months to December 2021 as margins improved.

Gas transmission volumes increased 3.6% year on year (YoY) to 114.3 m standard cubic meters per day in third quarter. The company expects volumes to rise 5-6% every year for the next couple of years due to increase in supplies to city gas and fertiliser plants.

In the last couple of days, GAIL has witnessed heavy buying interest. Over the last 5 days, the stock is trading up by 18%.

chart

For more details, check out GAIL India's financial fact sheet and quarterly results.

The bottom line

Mr Market's mood has been very bleak as tensions between Russia and Ukraine have intensified.

Many investors have been horrified by the Russian military action. The war could push crude prices even further, hampering the country's economic recovery.

But the oil and gas sector is seen as an attractive sector for both day traders and long term investors.

However, this sector entails a variety of substantial risks for market players. It tend to be more volatile than the broader market. It's sensitive to changes in the supply and demand of the underlying commodities.

These firms are also subject to legal and regulatory risk as a result of mishaps such as oil spills.

As a result, investors need to be more careful when choosing oil stocks. Focus on firms that can withstand storms as they will be better positioned to succeed.

In December 2021, India's #1 trader, Vijay Bhambwani, discussed why 2022 is going to be a great year for commodity trading, in one of his videos for Fast Profits Daily.

Tune in to the below video to find out why.

Happy Investing!

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...

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