OIL & GAS

- Chaithanya N Reddy

The oil and gas sector is one of India's eight key industries, and it has a significant impact on decision-making in all other critical sectors of the economy. Since India's economic growth is closely tied to its energy needs, more oil and gas are expected to be needed, which will make the industry very favourable for investment. As of 2021, India remained the third-largest oil consumer in the world.

The government has implemented a number of programs to meet the rising demand. It has permitted 100% Foreign Direct Investment (FDI) in a number of industry categories, including refineries, natural gas, and petroleum products, among others. As seen by the presence of Reliance Industries Ltd (RIL) and Cairn India, it now draws both domestic and global investment.

Government Initiatives

The budget proposes a 35.4% increase in capital expenditure, a 15% expansion of the national highway network and the addition of 25,000 kilometres of road. It also includes the establishment of four multi-modal logistics parks in the following year, an emphasis on electric vehicle (EV) charging infrastructure, and a new battery swapping policy.

Additionally, it suggested allocating ₹19,500 crores for the production-linked incentive (PLI) scheme for the production of polycrystalline solar modules, as well as a progressive reduction in customs tax to 7.5% for all projects capital goods imports.

Effect on Sector

Improved infrastructure connectivity would give a major momentum for oil and gas projects, with refineries being built in southern India and pipelines and city gas projects being constructed throughout the country.

Furthermore, the push for EVs and battery swapping along with new highway construction has given oil marketing businesses a fantastic opportunity to expand their retail outlets and consumer offers.

Oil and gas firms who are already converting to new energy sources, renewable energy, and environmentally friendly electricity to decarbonize their operations would have benefited from differential duty on unblended fuel to encourage biofuel blending. This has also opened up new channels for funding and assistance for environmentally friendly initiatives undertaken by oil firms in the fields of biofuels and green hydrogen as well.

Oil and Natural Gas Corporation

The largest producer of crude oil and natural gas in India is ONGC, a Maharatna firm, which accounts for around 75% of the country's domestic production. It is the sole public Indian company to be on Fortune's list of the "Most Admired Energy Companies." Additionally, the company is ranked 220 overall and 18th in "Oil and Gas operations" by Forbes Global 2000. Transparency International, which is renowned for its Corporate Governance procedures, has classified ONGC as the 26th-largest publicly traded global powerhouse. It is one of the top profit-making and dividend-paying businesses and the largest and most valuable exploration and production (E&P) company in the world.

As it can be observed in the above graph of ONGC, there is not much change in the performance of the stock before and after the budget. The stock prices have remained in the same range, i.e., ₹160 - ₹170. The stock reached a 52-week high of ₹192.95 in March 2022.

ONGC has a PE ratio of 3.95 which is lower than the industry average. This may indicate that the company is losing market share, having worse profit margins than its competitors, or having governance problems in the management, or it may simply have more debt on its books than its competitors. It can also be considered an undervalued stock. The Beta value of ONGC is 0.50 indicating that it is less volatile than the overall market.

Indian Oil Corporation Limited

With a workforce of more than 33,500 people, a sizable infrastructure for refining, marketing, and distribution, as well as cutting-edge R&D facilities, Indian Oil significantly contributes to the socio-economic growth of the nation.

Through its constantly growing network of more than 47,800 customer touch-points, over the past 60 years, Indian Oil has provided energy access to millions of people throughout the length and breadth of the nation with a mandate to ensure India's energy security and self-sufficiency in the refining & marketing of petroleum products. One of India's most valuable firms, it had a turnover of ₹6,05,924 crore (US$ 86.70 billion) and a market capitalization of ₹1,71,511 crore (US$ 26.61 billion) in FY20.

The stock price of IOC did not fluctuate much during the budget period. It remained in the price range of ₹75- ₹85. The stock reached a 52-week high of ₹94.33 in November 2021.

ONGC has a PE ratio of 4.11 which is lower than the industry average. This may indicate that the company is losing market share, or having governance problems in the management. It can also be considered an undervalued stock. The Beta value of ONGC is 0.76 indicating that it is less volatile than the overall market.

Future Outlook

With its consistently strong economic growth, India's energy demand is expected to increase more quickly than that of any other major economy. By 2035, India's energy demand, which was 753.7 megatonnes in 2017, is predicted to increase by double to 1,516 megatonnes. The country's contribution to the world's primary energy consumption is also anticipated to double by 2035.

By 2023, India wants to increase its refining capacity by half, to 450–500 million tonnes and the government intends to build over 5,000 compressed biogas (CBG) facilities.

When oil and gas prices are high, the equities in this sector can generate sizeable capital gains from rising share prices and lucrative dividend payments. Oil and gas is one of the riskiest investment sectors when all factors are taken into account. These stocks can be wise investments if made at the correct moment due to the industry's upside potential during times of economic boom. So, keep a keen eye on this sector before you invest!