Energy Sources Sector Analysis Report 

For Investors: Our Big Prediction

• The Indian energy sources industry can be broadly classified into - oil and gas which can be further classified into - upstream (exploration and production), midstream (storage and transportation) and downstream (refining, processing and marketing) segments.
• State-owned Oil and Natural Gas Corporation (ONGC) dominates the upstream segment. It is the largest upstream company in the Exploration and Production (E&P) segment, accounting for approximately 58.3% of the country's total oil output.
• Indian Oil Corporation (IOCL) dominates the midstream and downstream segment and operates a 13,391 km network of crude, gas and product pipelines. This is around 30% of the nation's total pipeline network. It also controls 10 out of 22 Indian refineries. Top three companies IOCL, HPCL and BPCL contribute more than 80% of the total length of product pipeline network in the country and Gas Authority of India (GAIL) as the largest share of the country's natural gas pipeline network.
• Within the downstream segment, India has 23 refineries - 18 are in the public sector, two in the joint sector and three in the private sector. Within the private sector, Reliance Industries (RIL) has the largest market share (30%) since it launched India's first privately owned refinery in 1999. Top three companies IOC, RIL and BPCL, contribute almost 70% of India's total refining capacity.
• India is the second largest refiner in Asia and the third largest consumer of oil in the world. It is also one of the largest exporters of refinery products due to the presence of various refineries. High Speed Diesel (HSD) is the major export item among petroleum products, followed by motor spirit (MS), Automatic Transmission Fluid (ATF) and Naptha.
• India increasingly relies on imported Liquified Natural Gas (LNG) and is the fourth largest LNG importer in the world after Japan, South Korea and China, and accounts for 5.8% of the total global trade. LNG imports account for about one-fourth of total gas demand, which is estimated to double over the next five years. To meet this rising demand the country plans to increase its LNG import capacity to 50 MT in the coming years. Gas Authority of India (GAIL) and Petronet LNG are some of the leading natural gas companies in India.
• The government of India has allowed 100% Foreign Direct Investment (FDI) in upstream and private sector refining projects. The FDI limit for public sector refining projects has been raised to 49% without any disinvestment or dilution of domestic equity in existing PSUs. According to data released by the Department for Promotion of Industry and Internal Trade (DPIIT), FDI inflows in the Indian non-conventional energy sector between April 2000 and March 2019 stood at US$ 7.8 billion.

• Supply
• In the upstream segment, supply from the domestic market caters to 20% of the total demand for crude oil. In the downstream segment, refining has seen significant capacity addition in the recent past. In the gas segment, with the domestic gas supplies on a decline, the share of imports in gas sector is rising.
• Demand
• In the past, we have seen a fair degree of correlation between the growth in petroleum products and the growth in the overall economic activities. Thus, we expect the long-term demand to be in line with economic growth.
• Barriers to entry
• High, due to the capital intensive nature of the industry and economies of scale. Government permission is also required to commence operation in the upstream segment.
• Bargaining power of suppliers
• In the case of crude oil, prices are globally determined and are highly susceptible to geopolitical events, economic growth and demand factors, economic policies, and speculative bets. OPEC has a significant influence on demand supply dynamics in crude oil.
  
  For petroleum products, given the surplus capacity in the country the bargaining power is low.
• Bargaining power of customers
• Customers have low/non-existent bargaining power as they are price-takers not price makers.
• Competition
• Low, as just a few players operate in the Upstream, Midstream and Downstream segment. However, with new reforms announced in energy sector, more private players are likely to enter the sector thus increasing the competition.
• Threat of Substitutes
• Low, as other sources of energy like solar, wind, coal and hydro-electric power are less developed. Pressure from alternative sources might rise in future.

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• India's crude oil production in FY23 stood at 29.2 MMT (million metric tonnes). As of April 2023, total oil refining capacity stood at 253.91 MMT, making it the second-largest refiner in Asia. Private companies owned about 35% of the total refining capacity.
• Consumption of petroleum products stood at almost 4.44 million barrels per day (BPD), up from 4.05 million BPD in FY22. High-Speed Diesel was the most consumed oil product in India and accounted for 38.6% of petroleum product consumption in FY23.
• The price of Brent Crude averaged US$ 78.56/bbl during March 2023 as against US$ 82.49/bbl during February 2023 and US$118.81/bbl during March 2022.
• The Indian basket crude price averaged US$ 78.54/bbl during March 2023 as against US$ 82.28/bbl during February 2023 and US$ 112.87 /bbl during March 2022.
• India's LNG import stood at 20.1 million metric tonnes (MMT) in FY23. Gross production of LNG was 2,883 MMSCM in January 2023.
• In 2022, the European and global gas markets faced a significant supply shock due to Russia's substantial reduction in pipeline gas deliveries to the European Union. Throughout the year, these deliveries were reduced by 80%, consequently leading to a global energy crisis.
• Europe's TTF benchmark price saw peaks exceeding US$ 90/MBtu in 2022, even as the European Union and its partners debate ways to reduce reliance on Russian gas and curtail its revenue from energy sales.
• Energy shortages also resulted from the strains on the gas supply in several developing nations that depend on imported gas, particularly Pakistan and Bangladesh. Major growth markets for gas such as India and China meanwhile sharply reduced their LNG imports in 2022.
• In March 2023, the Petroleum and Natural Gas Regulatory Board (PNGRB) announced that it has amended the PNGRB Determination of Natural Gas Pipeline Tariff regulations to incorporate provisions for Unified Tariff for natural gas pipelines with a mission of "One Nation, One Grid, and One Tariff."
• Based on the regulations, PNGRB notified a levelized Unified Tariff of Rs 73.93/MMBTU and created three tariff zones for Unified Tariff, where the first zone is up to a distance of 300 kms from the gas source, the second zone is 300-1.200 kms, and the third zone is beyond 1,200 kms.

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• Demand for oil post the pandemic is expected to rebound with gradual resumption of economic activity. As per CRISIL Research, domestic petroleum product demand is expected to grow at 3-3.5% CAGR in the next five years against the robust growth of 5.6% in the past five years.
• With an economy that has grown consistently, underpinned by robust domestic demand, world's largest youth population and increasing urbanization, India remains vitally important to global energy markets.
• Over the past few years, the Government has executed a raft of measures geared to advance the prospects of the upstream hydrocarbon sector. It has formulated and approved a new exploration and licensing policy named Hydrocarbon Exploration and Licensing Policy "HELP" vide resolution in 2016 whereby it provides a uniform license to enable E&P operators to explore and extract all hydrocarbons resources including conventional and non-conventional oil and gas resources.
• Some of the key aspects of this new licensing regime are Open Acreage Licensing, uniform license for all types of hydrocarbons, revenue sharing model, marketing and pricing freedom, low royalty for offshore fields, and continuous exploration under contract period etc.
• The government has also approved a new policy framework in 2018 to promote and incentivize Enhanced Recovery (ER)/Improved Recovery (IR)/Unconventional Hydrocarbon (UHC) production methods/techniques. Incentives will be available for a period of 10 years from the date of commencement of the projects. Fiscal incentives include waiver of 50% of cess on oil production and 75% of applicable royalty on gas production on the eligible quantum of production volume.
• The Government is bullish on long-term prospects of gas and has set a clear mandate of achieving a 15% share for gas in energy mix by 2030. With the aim of spurring indigenous gas production and increasing transparency, it brought in a new pricing framework in 2014, replacing the erstwhile regulated pricing regime with a pricing formula linked to international prices.
• It has also implemented a special pricing regime to incentivize gas development in more difficult terrain (Deepwater/Ultra-Deepwater/HP-HT).
• In a positive development, the Government launched India's Gas Exchange, the first nationwide online delivery-based gas trading platform, in June 2020. It paves the way for a more transparent, fair and locally discovered pricing mechanism, essentially eliminating formula-driven pricing control and motivating greater participation from companies, sellers and buyers alike.
• The Government is also planning to invest US$ 2.9 billion in the upstream oil and gas production to double the natural gas production to 60 BCM and drill more than 120 exploration wells by 2022. Gas consumption is projected to reach 143.1 BCM by 2040.
• India targets US$ 100 billion worth investments in gas infrastructure by 2022, including an addition of another 228 cities to city gas distribution (CGD) network. This would include setting up of RLNG terminals, pipeline projects, completion of the gas grid and setting up of CGD network in more cities. Some of the major players operating in the CGD market are Indraprastha Gas Limited and Mahanagar Gas.
• In the Budget 2020-21, the Government announced extension of Ujjwala scheme (under which it provides a free LPG gas connection to women below the poverty line), which has already benefitted 80 million households, to cover 10 million more beneficiaries. The government will also add 100 more districts to the CGD network in the next three years.
• In a major boost for the Union Territory of Jammu and Kashmir and the sector, the government has also announced that a gas pipeline project will be taken up. Another key announcement by the government includes an Independent Gas Transport System Operator, which will be set up for facilitation and coordination of booking of common carrier capacity in all-natural gas pipelines on a non-discriminatory open access basis.
• The Government has also talked of monetizing oil pipelines of Oil Marketing Companies (OMCs) and gas pipelines of GAIL via Infrastructure Investment Trusts (InvITs) though the time frame/roadmap thereof has not been revealed.

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How has the energy sector performed in the past decade and when is a good time to invest in the sector?

The energy indices (NIFTY and BSE) have provided investors returns of over 300% in the past decade. The revenues of energy companies are dependent on prices of commodities such as oil and gas. Therefore, the best time to buy stocks in this sector is during a downcycle, when the prices are low.

To know more about the sector's past and ongoing performance, have a look at the performance of the NIFTY Energy Index and BSE Energy Index

Where can I find a list of energy stocks?

The details of listed energy companies can be found on the NSE and BSE website. However, the overload of financial information on these websites can be overwhelming.

For a more direct and concise view of this information, you can check out our list of energy stocks.

Which energy stocks were the top performers over the last 5 years?

Indraprastha Gas and Oil India were the top performers over the last 5 years in terms of sales and profit growth.

Indraprastha Gas growth can be attributed to it being the pioneer in city gas distribution (CGD) and enjoying an exclusive position in the business, besides the strong parentage of GAIL and Bharat Petroleum Corporation (BPCL).

Oil India has also done well on the back of its significant market position in the domestic oil and gas exploration and production (E&P) industry and robust E&P infrastructure and proven technical capabilities.

To know which other companies performed well over the last 5 years, use Equitymaster's stock screener.

What kind of dividend yields do energy stocks offer?

As majority of the energy (oil and gas) companies in India are PSUs and current norms prescribe PSUs to pay a minimum annual dividend of 30% of profit after tax (PAT) or 5% of net worth, whichever is higher, PSU energy stocks pay handsome dividends.

Oil India and GAIL are the top energy stocks offering high dividend yields.

To know which other energy stocks offer high dividend yields, you check out our entire list of dividend yielding energy stocks.

Which are the energy stocks with the highest return on capital employed (RoCE)?

Return on capital employed (ROCE) is a financial ratio that can be used in assessing a company's profitability and capital efficiency by determining how well the management is able to allocate capital for future growth. An RoCE of above 15% is considered decent for companies that are in an expansionary phase.

Oil India, MRPL, and Chennai Petroleum are the top energy stocks right now on the Return on Capital Employed (RoCE) parameter.

To know which other energy stocks offer great return on capital employed, you can check out the top energy stocks offering the best RoCE here.

Which are the best energy stocks to invest in currently?

Investing in stocks requires careful analysis of financial data to find out a company's true worth. However, an easier way to find out about a company's performance is to look at its financial ratios.

A commonly used financial ratio used in the valuation of energy stocks is -

• Price to Book Value Ratio (P/BV) - It compares a firm's market capitalization to its book value. A high P/BV indicates markets believe the company's assets to be undervalued and vice versa.

  To find stocks with favorable P/BV Ratios, check out our list of energy stocks according to their P/BV Ratios

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