How to analyse oil and gas stocks
Oil and gas covers very different businesses. Upstream companies find and produce crude oil and gas. Refiners turn crude into petrol, diesel and other products. Marketing companies sell fuel through pumps. City gas companies supply piped gas. A rise in crude prices helps some of these and hurts others.
The numbers that matter
| Metric | What it tells you | What healthy looks like |
|---|---|---|
| Realised crude or gas price | For producers, the price actually earned per barrel of oil or unit of gas. | Understand its range across cycles; profits track it closely. |
| Gross refining margin (GRM) | For refiners, the value of products made from a barrel of crude minus the cost of that crude. | At or above regional benchmarks across cycles, showing an efficient refinery. |
| Marketing margin | For fuel retailers, the gap between what they pay for fuel and what they sell it for at the pump. | Positive and stable; long stretches of losses on fuel sales are a warning. |
| Production volumes | For producers, how much oil and gas they extract each year. | Stable or growing, not falling as old fields age. |
| Net debt to EBITDA | Borrowings minus cash, compared with one year’s operating profit. | Comfortable even in a weak year for prices or margins. |
| Dividend payout | The share of profit paid out as dividends. | Steady payouts backed by cash flow, not by borrowing. |
Know which part of the chain you are looking at
When crude prices rise, a producer earns more per barrel. A refiner or fuel retailer pays more for its main raw material. If retail fuel prices do not rise as fast, the retailer’s margins shrink. So the same news can push these stocks in opposite directions.
Many companies are integrated, meaning they do more than one of these. Read the segment results in their reports to see which part earns most of the profit.
The role of government
The government owns large stakes in several oil and gas companies and can influence fuel and gas pricing, taxes and subsidies. A company may be asked to hold prices steady when crude rises, or to share the cost of subsidised fuel. Profits can depend on decisions outside the company’s control.
Reading refining margins
Say a refiner buys crude at ₹5,000 a barrel and sells the products made from it for ₹5,500. Its gross refining margin is ₹500 a barrel. On 10 crore barrels a year, a ₹100 change in that margin moves profit by ₹1,000 crore. Refining margins swing with global demand for fuels, so treat a high-margin year as a peak, not a base.
Red flags
- Fuel retailers selling below cost for long periods without clear compensation.
- Production falling year after year as old fields decline.
- Large inventory gains or losses from crude price moves hiding the core margin.
- Big debt-funded projects with uncertain returns.
- Profits that depend on one-off government payments.
Common beginner mistakes
- Assuming rising crude prices are good for every oil and gas stock.
- Valuing a refiner on a year of unusually high refining margins.
- Ignoring the effect of government pricing and tax decisions.
Common questions
How does crude oil price affect oil company stocks?
Producers usually gain when crude rises, while refiners and fuel retailers can lose if they cannot raise selling prices quickly. It depends on which part of the chain the company is in.
What is GRM in oil refining?
Gross refining margin is the value of products made from a barrel of crude minus the cost of that crude. It is the main driver of a refiner’s profit.
Why does government policy matter for oil and gas stocks?
The government owns stakes in many of these companies and influences fuel and gas prices, taxes and subsidies. These decisions can change profits sharply.
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