Oil & Gas Mixed Q3 Outlook: Refining Surges, Upstream Dips Amid Price Volatility
Overview
India's oil and gas sector faces a mixed third quarter for FY26. Strong refining margins are set to boost earnings for companies like Reliance Industries, HPCL, BPCL, and IOCL. However, falling Brent crude prices are expected to pressure upstream producers such as ONGC and Oil India, leading to potential EBITDA declines. City gas distributors anticipate healthy growth, while gas utilities may see muted performance.
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Mixed Fortunes Ahead for Oil and Gas Sector
The Indian oil and gas sector is poised for a bifurcated performance in the October-December quarter of FY26. Analysts anticipate significant gains in refining operations, counterbalanced by weakness in upstream exploration and production segments. This divergence will shape earnings reports across major players.
Refining Strength Lifts OMCs and Reliance
Singapore's gross refining margins (GRMs) surged nearly 97% quarter-on-quarter to approximately $7.5 per barrel. This surge directly benefits oil marketing companies (OMCs) and integrated players like Reliance Industries. Hindustan Petroleum Corporation (HPCL), Bharat Petroleum Corporation (BPCL), and Indian Oil Corporation (IOCL) are projected to see EBITDA growth between 9% and 18% sequentially. Reliance Industries' oil-to-chemicals (O2C) segment is estimated to drive its earnings, with overall EBITDA expected to rise by about 5% QoQ, fueled by its O2C business posting an estimated 15% growth.
Upstream Headwinds Emerge
Conversely, upstream companies are bracing for a tougher quarter. Brent crude prices dipped by about $5.4 per barrel sequentially, averaging near $63.6 per barrel. This price decline is expected to reduce realisations for Oil and Natural Gas Corporation (ONGC) and Oil India by approximately 7-8%, potentially leading to a similar drop in their year-on-year EBITDA. Production volumes for these firms are forecast to remain largely flat.
City Gas Distributors Show Resilience
City gas distribution (CGD) companies are expected to deliver robust results, supported by stable margins and volume growth. Mahanagar Gas is anticipated to lead with volume growth between 12-14%, followed by Indraprastha Gas with around 5% growth. Gujarat Gas, however, may face an 8% decline in volumes.
Gas Utilities Face Flat Growth
Gas utilities are projected to deliver a more moderate performance. Petronet LNG's EBITDA growth is expected to be flat, while GAIL and Gujarat State Petronet are anticipated to report slower growth.
Analyst View: Upstream Preference
Dayanand Mittal, an Oil & Gas Analyst at JM Financial Institutional Securities, favors upstream companies like ONGC and Oil India over OMCs. He expressed concerns that OMCs' aggressive capital expenditure in refining and petrochemicals might not serve minority shareholders well, citing single-digit returns from refining projects and terminal value risks in petrochemicals due to Chinese competition. Mittal noted that while OMC valuations have corrected, significant upside seems limited, with the risk of an excise duty hike adding caution. He remains positive on Oil India, projecting 15% earnings compounding over the next two to three years, driven by production growth and the expansion of Numaligarh Refinery.
