The year 2021 was not a bad one at all for Indian oil and gas companies. Many parameters showed improvement. For instance, the consistent increase in oil prices (Brent crude up 47% year-to-date) meant better realizations for state-run oil and gas producers such as Oil and Natural Gas Corp. Ltd (ONGC) and Oil India Ltd. Both companies saw significant improvement in their fortunes. Note that ONGC’s net oil realizations have consistently improved in the first three quarters of this calendar year. For the June and September quarters, ONGC’s realizations stood at $65.6 a barrel and $69.4 a barrel, increasing by 128% and 67% year-on-year (y-o-y), respectively.

Further, the rebound in demand for auto fuels drove the improvement in marketing margins for oil marketing companies (OMCs). What’s more, refining margins, too, staged a substantial rise towards the end of the year, auguring well for OMCs. Separately, in early 2021, a combination of lower gas prices and robust gas demand boosted margins of city gas distribution (CGD) firms.

As we approach another calendar year, there are challenges in the near term. For one, crude oil prices have come off the peak and remain volatile now because of the threat from the Omicron coronavirus variant. Note that the Brent crude oil price touched a high of $86.40 a barrel on 25 October and is now hovering around $75 a barrel, according to Bloomberg data.

Needless to say, this would cap realizations of upstream oil companies. Further, after a sharp rebound, refining margins are now range-bound, which isn’t good news for refiners. High international gas prices also pose headwinds on import costs for liquefied natural gas (LNG). As things stand, the initial part of 2022 may well have these concerns until there is some normalization, point out analysts.

According to Nitin Tiwari, analyst at Yes Securities, crude oil prices could remain range-bound. Experts at HDFC Securities Ltd, too, have ruled out a significant oil price correction unless international crude supplies rise substantially. This could well mean that the upside from expectations of higher oil price may be limited for shares of ONGC and Oil India. Both stocks have come off from their October highs by 20-33%. Even so, year-to-date gains for ONGC and Oil India are about 50% and 68%, respectively.

Some analysts say the consumption themes may fare relatively better. OMCs have seen a regular improvement in volumes led by rising demand and have demonstrated the ability to maintain marketing margins despite firm crude prices. This puts the OMCs such as Bharat Petroleum Corp. Ltd (BPCL), Hindustan Petroleum Corp. Ltd (HPCL), and Indian Oil Corp. Ltd (IOCL) in a sweet spot. However, one must not forget that their earnings are also dependent on refining margin outlook which, as mentioned earlier, have now flattened and remain range-bound. Further, analysts at Antique Stock Broking Ltd say that LPG under-recoveries is a concern from a near-term perspective, but likely to be compensated by strong marketing margins.

Notably, BPCL shares have underperformed the shares of the other two OMCs this year. While BPCL’s large special dividend paid in September does offset the underperformance to some extent, progress on the company’s privatization is a key thing to watch for. This can have a bearing on the other two OMCs as well, depending on the valuations BPCL fetches. Even so, further delays in privatization can dampen Street expectations.

Meanwhile, investor interest in gas utilities remains high what with the sharp rally in the stocks in 2021, helped by lower input gas costs. However, gas prices have risen now and pose a risk to margins. Here, price hikes taken by the companies do offer some respite. According to Tiwari, LNG prices are likely to moderate by mid-2022 and this should support earnings of the CGDs.