India Infoline bullish on oil ancillary space

Prayesh Jain , Analyst-Oil and Gas, India Infoline  is very cautious on the oil marketing stocks but was bullish on oil ancillary services. He said that his target price for Aban Offshore is Rs 5,247 and he is bullish on Garware Offshore as well.

Excerpts from CNBC-TV18's exclusive interview with Prayesh Jain:

Q: What is your outlook on the entire oil and gas space currently? What would be your key picks at this stage if one wanted to play oil and gas rally?

A: In terms of the entire spectrum on the upstream segment, ONGC and Cairn don’t look great as of now, especially Cairn, after witnessing a sharp run-up. In terms of oil marketing companies, we are extremely cautious and avoid calls on those stocks.

In terms of pure refining, we are bullish on stocks like Chennai Petroleum . We are mostly bullish on oil allied services, which include stocks like Aban Offshore.

Q: What would be your price target on Aban Offshore? It has seen a fairly decent rally over the past few weeks. How much more value do you see?

A: Our target price for the stock is at Rs 5,247 and that is a conservative one considering the existing day rates of the market. There are significant upsides possible in the day rates, especially in light of crude touching USD 135 per barrel. Even the oil sands in Canada are becoming viable. So, deepwater projects are going to see significant investments, which will warrant huge demand for offshore rigs. Aban being the 15^th largest player would definitely gain on this front.

Q: How would you track two other stocks from the oil ancillary space- Great Offshore and Garware Offshore ?

A: Great Offshore and Garware definitely look good. On Garware, we have a target of Rs 280-300. Garware is supplying Platform Supply Vessels and Anchor Handling Tugs. These vessels are required not just at the exploration stage but also from the exploration stage to production stage. For the kind of offshore spend, these vessels are going to be in demand and day rates of these vessels are also expected to be on a firm trajectory.

Q: There has been a significant beating down of the oil marketing stocks. Their problems are very well known in terms of the cash limits and cash crunch that they are being put through. At any level, would you say that they would be turning into a buy now that some political help is coming by?

A: We can give a trading call on it. Trading buys for these could be short-term. But uncertainty still exists over what will happen next year. If crude stays at USD 135 per barrel, under-recoveries would be above Rs 2,00,000 crore. The question is what kind of sharing will the government and upstream companies take, how many bonds will be issued and what kind of duty structure changes would happen. There is a lot of uncertainty. So, I would not be an aggressive buyer in the stock at any level unless and until there is some clarity from the government.