Attractive valuations limit downside risks for upstream players

There is a clear downtrend in the global oil and gas (O&G) market as demand is slow while supply is at a surplus.

- DEVANGSHU DATTA

In August, Brent crude settled at $67.4 per barrel (bbl), down 3 per cent month-on-month (Mo-M) and a decline of 14.6 per cent year-on-year (Yo-Y). Some analysts are estimating a drop below the $60 mark given Chinese industrial slowdown, OPEC plussignalling higher supply from October, and elevated inventory levels.

Moreover, there may have been a structural shift post-pandemic in demand for oil since work-from-home has cut transportation needs alongside increasing electric vehicle or EV penetration.

India’s upstream players, ONGC and Oil India are down 18 per cent and 32 per cent respectively over the past 12 months, and valuations imply crude will trend well below long term average. Compared to global peers, Indian upstream players trade at a steep discount with investors cautious about policy specifics like regulated pricing (administered price mechanism or APM gas prices and windfall taxes in the past), aswell as weak production growth.