The key reason is persistent supply tightness. Damage to multiple energy facilities and delays in restoring output mean that even if the situation improves, prices are unlikely to drop sharply. A risk premium is also expected to remain built into oil prices for the foreseeable future.
Brent crude slipped to around $94–95 per barrel as markets expect the US and Iran to restart peace talks this week, which could ease supply concerns.This environment is positive for upstream companies like ONGC and Oil India. Current valuations, according to Sen, are still factoring in much lower crude prices.
If oil sustains around $80–85 per barrel, earnings could see a meaningful 17-18% upgrade on the standalone EPS for both companies. He added, “I can only tell you that most of the EPS, continues to build in anywhere between $65 to 75 of realisations. And as I said, if you have a $10 increment on this level, you have around a 13 to 14% increment in standalone EPS.”However, there is a catch. If crude rises too sharply, the risk of government intervention through windfall taxes increases. Ironically, a more stable price environment could be more favourable for these companies.
For oil marketing companies (OMCs), the situation remains challenging. Higher crude prices hurt marketing margins, especially when retail fuel prices are not adjusted.
Sen pointed out that OMC stocks could still see some downside before stabilising. Historically, during major crises, these stocks have corrected to about 0.7–0.8 times book value.
At the same time, balance sheets are much stronger now compared to previous cycles. Lower debt levels and better cash flows could help companies absorb losses for longer.
Still, recovery will depend on either a correction in crude prices or an increase in retail fuel prices.
For the entire discussion, watch the accompanying video
Get live stock market updates on our blog
