Oil & Gas Q2 Review: Weak margins and higher input costs sink July-September quarter earnings – what should investors do?

Oil & Gas Q2 Review, Upstream Companies, City Gas Distributors, Oil Marketing Companies, Gas Utilities: The second-quarter earnings of the Oil and Gas sector for the financial year 2022-23 (Q2FY23) have been poor mainly due to weak margins and higher input costs, domestic brokerage ICICI Securities said in its review report, while decoding the detailed analysis for OMCs, Upstream and Gas companies.

“The weakness in Q2 was due to sharply lower OMC (Oil Marketing Companies) earnings, with still material marketing losses and relatively lower delta from GRMs (gross refining margins) impacted results. They continued to see elevated losses for the second successive quarter,” the brokerage said.

For gas companies, constraints on gas supply due to a 2.5mt LNG stoppage by Gazprom in May 2022 and the very high gas prices resulted in a very weak quarter, ICICI Securities said in its report.

Similarly, Upstream companies such as ONGC and Oil India reported healthy earnings in Q2, with limited gains despite the windfall tax impact on oil realisation.

Oil Marketing Companies (OMCs)

Earnings for three OMCs (IOCL, BPCL, HPCL) remain subdued for the second straight quarter, with retail marketing losses for petrol and diesel material at Rs1/ltr & Rs10/ltr, respectively. With a weak Q2 show, OMCs reported the weakest first half of FY23 performance in the last decade for OMCs.

City Gas Distribution (CGD)

The three main CGD companies delivered a weak Q2FY23, with a mixed bag of results performance. IGL and MGL saw the pressure from very high gas costs impacting the margins; GGL, however, saw a dip in volumes but a sharp jump in EBITDA/scm ensuring stellar profit.

We continue to have a BUY rating on IGL & MGL and an ADD rating on GGL, the brokerage said.

Upstream Companies

Operating profits of ONGC and OIL India improved owing to sharply higher oil & gas realisations despite the impact of the ‘windfall’ tax imposed effective July 1, 2022. The profit growth was hampered by a material benefit of deferred tax adjustment seen in Q2 for ONGC.

ICICI Securities retained BUY on OIL and ONGC.

Gas Utilities

The gas utility companies such as GAIL, Petronet LNG, and Gujarat State Petroleum delivered a better but mute show due to a weak demand environment, weak gas trading results for GAIL, and constrained gas supplies owing to Gazprom contract volumes unavailability in Q2FY23.

No change in ratings for the companies; BUY on GAIL & GSPL; REDUCE on PLNG, ICICI Securities mentioned.