We did looked into this sector and also published our white paper in April 2014. At that time this was the only sector which was trading at discount. There were many macro and geopolitical concerns at that time playing a dovish role on the market.

We did talked about three companies (ONGC, Oil India and Cairn India) in detail and shared our rationale to invest with ONGC & Oil India six months ago. So far ONGC has given a return of 25% and Oil India has given a return of 31%. Cairn India on other hand has given a negative return of 16% for the same period. If you want to read that white paper please click here.(white paper – April 2014)

We will once again go through with our expectations for both, ONGC and Oil India in this post but we will also be looking at in this sector if there are any other opportunities that have emerged within the last six months.

A population of 1.3 billion people with growing number of middle class family section, is enough for any investor to believe that there will be a good demand for oil and gas in the country. India imports almost 70% of its oil and gas from overseas and ONGC is the biggest manufacturer in this sector.

There are many different business models available in this sector which are worth to look. For example IGL (Indraprastha gas ltd) which imports gas from overseas and supplies it to the retail and manufacturer in the capital of the country and has its own competitive edge.

So here are the list of businesses that we looked again within the sector:

Gail Petronet LNG Guj Gas
IGL Guj State Petro Aban Offshore
Selan Explore HOEC Jindal Drilling
Alphageo Dolphin Offshore Deep Industries

 

Now as you all are aware, our top priority always remain that we don’t lose any capital. We run our top 3 filters on all the businesses:

They are as follows:

  • We like businesses with low or no debts
  • We look businesses that are giving extraordinary returns on investor’s capital (ROE=> 20%)
  • And last but not least they are generating surplus cash flows from its operations

Businesses that passed these filters are:

Guj Gas IGL Dolphin Offshore

 

Gujarat Gas:

Gujarat gas operates in the state of Gujarat and they are in the business of supplying gas from producers to end users. They reported ROE 38% for the year 2014. We calculated its fair value in the range of Rs 404 – Rs 510 for that year. We and many analyst are not expecting any earnings growth for the year 2015 and our expectations of its fair value is in range of Rs 294 – Rs 338. We don’t like businesses who are not growing their intrinsic values year after year.

IGL:

IGL supplies gas to retail as well as wholesale customers. They reported their ROE at 22% for the year end 2014. We calculated its fair value for the year end 2014 in range of Rs 232 – Rs 250. Looking at the analysts’ earnings expectations, we are expecting its fair value for the year end 2015 in the range of Rs 262 – Rs 287. No matter how good quality business is, you make money when you buy them cheap.

Dolphin Offshore Enterprise:

This is a very new business entered in our radar. Total market cap of Rs 327 crore and daily volumes turnover of stocks averages around 700,000 which translates a business of 13.37 crore a day on National stock Exchange. Looking at it financials for the year end 2014, we calculated its fair value to be in range of Rs 225 – Rs 230.

None of the brokers or analysts follow this stock. Its profits are very volatile and without doing a research on its future earnings and finding out its competitive edge and investing in this business is not investment but gamble.

Our Platform at this stage estimates average 8% growth in its fair value every year. We are doing our research at this time and will share with you when the time is appropriate.

Always calculate and know your risk before buying into any position and execute your plan either by booking profits at right time or divorcing with that position.

 

ONGC:

ONGC is one of our best pick in this sector. We do still expect its 2015 fair value in range of Rs 315 – Rs 325 and for 2016 we are expecting in range of Rs 366 – Rs 380. They are bit expensive to buy today.

Oil India:

We own this stock in our portfolio and we got into this stock six months ago as it was trading at very cheap price and we were confident of its future prospects. We still are expecting its fair value for 2015 in the range of Rs 491 – Rs 516 and for 2016 to be in range of Rs 582 – Rs 598.

Hope these valuations will help you to take your own investment decisions.