How to Analyse an Oil and Gas Stock (GRM, SOTP)

In the December 2024 quarter, Indian Oil reported a gross refining margin of $2.95 per barrel — a figure so thin it suggested the company barely made money turning crude into fuel (IOC Q3 FY25 concall). The reality was almost the opposite. That headline GRM was, in management's own words, "misleadingly low due to Rs. 5,200 crore inventory losses"; strip the inventory hit out and the normalised GRM was $6.60 per barrel — more than double (IOC Q3 FY25 concall). One number said the refinery was struggling; the other said it was doing fine. The difference was an accounting artefact of crude prices falling while oil sat in tanks. (Illustration of how to read the numbers, not a view on the stock.)

That gap is the whole game. An oil and gas company does not earn money the way a bank or a software firm does. It pumps crude out of the ground, or buys it on a global market it can't control, turns it into petrol and diesel at a margin set by international product cracks, sells that fuel through a regulated retail network, and — for the integrated giants — feeds the leftover molecules into petrochemicals. Each of those is a different business with a different economic engine, and a single consolidated P&L blends them into mush. Net profit, revenue growth, even the headline GRM can all mislead you, because they sit at the end of a chain whose first link is a crude price no Indian company sets. Read oil the way the people who run it do, and you watch a different set of numbers entirely.

This is how to analyse an oil and gas stock the way a sector analyst does: the handful of segment-level numbers that actually decide the outcome, where the important ones hide (almost always in an investor deck or buried in a concall, not the income statement), how to value a business that is really four businesses stapled together, and the one mistake that has cost more energy investors money than any blow-up — treating one quarter's fat refining margin as if it were the new normal.

A boundary first: you will not forecast the crude price, and neither can management. Brent is set by OPEC, geopolitics and global demand. What you can do is read whether a company's margins, its plant utilisation, its sourcing edge and its balance sheet are built to compound through a cycle nobody can time.

What actually drives the economics of an oil and gas company?

Picture a business stitched together from three very different shops under one roof. The first is a wildcatter who owns the well — it makes more money when crude is dear and nothing it does changes the price it gets. The second is a refiner who buys crude and sells fuel — it lives on the gap between the two, indifferent to the absolute level. The third is a shopkeeper running 25,000 petrol pumps at a price the government watches closely — steady volumes, thin regulated margins, occasional political squeeze. The integrated Indian majors are all three at once; the pure upstreamer (ONGC) is mostly the first; the oil marketing companies (IOC, BPCL, HPCL) are mostly the second and third.

Three consequences fall out of that picture, and they govern everything.

Upstream wins when crude rises; downstream is hedged against it. An exploration company's profit moves almost one-for-one with the oil price, because its cost to lift a barrel is roughly fixed. A refiner-marketer is far more neutral — it pays more for crude but charges more for fuel, so what matters is the spread, not the level. In an integrated company these two pull in opposite directions, which is exactly why you must read the segments separately. A blended number tells you nothing about which engine is running.

Margins are made of cracks and discounts you have to go and find. A refiner's GRM is built from international "crack spreads" — the premium of diesel or petrol over crude — plus whatever discount it can squeeze on sourcing. Since 2022, that discount has been Russian crude, and how much a company buys swings its margin by dollars a barrel. None of this is on the income statement.

Regulation caps the upside and socks away the downside. Retail fuel prices in India are managed, not free. When crude spikes, marketing margins get crushed because pump prices don't move fast enough — and the government may or may not compensate the loss later through subsidies on LPG. That under-recovery overhang is a uniquely Indian risk that a US refiner never faces.

Hold those three — upstream-vs-downstream, the crack-and-discount spread, and the regulatory cap — and the metrics below stop being a list and become a single story.

The metrics that matter — and where they hide

Here is the uncomfortable part for anyone used to reading a P&L: almost none of the numbers that decide an oil investment are on the income statement. GRM, refinery throughput, utilisation, the marketing margin, inventory gains and losses, upstream crude and gas realisation, the petrochemical spread, the Russian-crude share — these live in the investor presentation and get quoted on the concall, often in passing. The income statement gives you sales and operating profit; it will not tell you whether profit came from a fat refining spread, an inventory windfall, or a one-off subsidy receipt — and those have completely different futures.

Gross refining margin (GRM)

The dollars of margin a refiner makes on each barrel of crude it processes — reported GRM is what actually printed; normalised (or "core") GRM strips out inventory gains and losses. It matters because it is the heartbeat of the refining business, and it swings violently. Where to find it: never on the income statement; it sits in the deck and gets quoted per barrel on the call, usually both ways. The swings are brutal. BPCL's GRM crashed to $4.88/bbl in Q1 FY26 (BPCL Q1 FY26 concall), then rebounded to $13.25/bbl two quarters later (BPCL Q3 FY26 investor presentation) — a near-tripling in six months, on the same refineries. The discipline is to always read normalised over reported, and to read it across six to eight quarters. A single quarter tells you where global cracks were, not how good the refiner is.

Inventory gains and losses

When crude prices move while a refiner is holding oil and products in its tanks, it books a paper gain (prices rose) or loss (prices fell) that has nothing to do with operating skill. It matters because it can swamp the real number — exactly what happened to Indian Oil. Where to find it: flagged on the call, almost never broken out on the income statement. IOC's Q3 FY25 reported GRM of $2.95 was dragged down by "Rs. 5,200 crore inventory losses," against a normalised $6.60 (IOC Q3 FY25 concall). What "good" looks like here is not a number but a habit: a management that tells you the inventory effect every quarter is letting you see the real engine; one that quotes only the flattering version is hiding the cycle.

Refinery throughput and utilisation

Throughput is how much crude was actually processed; utilisation is throughput against nameplate capacity. They matter because refining is a fixed-cost business — below a certain run-rate a refinery loses money on every barrel, above it each extra barrel is nearly pure margin. Where to find it: the deck, in MMT and percent. The Indian PSU refiners run remarkably hot: BPCL processed 10.51 MMT at 119% utilisation in Q3 FY26 (BPCL Q3 FY26 investor presentation) and ran its full FY25 at 115% (BPCL FY25 investor presentation), while IOC ran 17.6 MMT at 99.5% in Q2 FY26 (IOC Q2 FY26 concall). Above-100% utilisation is normal here — nameplate is a conservative design figure. The thing to watch is a falling run-rate, or new capacity ramping into weak cracks, which converts operating leverage into a drag.

Marketing margin and the regulatory squeeze

The margin an OMC makes selling petrol and diesel through its pumps — small per litre, enormous in aggregate, and squeezed whenever crude rises faster than managed pump prices. It matters because for the OMCs, marketing is often a bigger profit pool than refining, and it is the part most exposed to politics. Where to find it: rarely quantified cleanly; you read it through the under-recovery and the throughput-per-outlet. BPCL ran the highest throughput per outlet among OMCs at 141 KL/month in Q3 FY26 (BPCL Q3 FY26 investor presentation) — a sign its network sweats harder than peers. The squeeze shows up in LPG: HPCL flagged an LPG under-recovery of ₹503 crore for one quarter alone (HINDPETRO Q3 FY26 concall), the kind of regulated loss that may or may not be compensated by subsidy later.

Upstream realisation (crude and gas)

For an explorer, the price actually received per barrel of crude and per unit of gas, after any government formula. It matters because upstream profit moves almost entirely with this number, and Indian gas prices are administered, not market-set. Where to find it: the deck and the call, in $/bbl and production volumes. ONGC guided crude production of 24–25 MMT for FY26 (ONGC Q2 FY26 concall) and gas-sales growth of 8–10% (ONGC Q2 FY26 concall) — but the gas growth was already flagged "at_risk" against that guidance (Inve data). For a pure upstreamer the volume and the realisation both matter; flat production at a falling crude price is a double hit.

Petrochemical spread

The margin between a petrochemical product (polymers, polyester intermediates) and its feedstock. It matters because integration into petchem is how a refiner escapes being a pure fuel price-taker — and it's the swing factor for Reliance in particular. Where to find it: the deck, segment EBITDA, occasionally the spread itself. IOC reported petrochemical earnings of roughly ₹2,000 crore for H1 FY26 (IOC Q2 FY26 concall) and is targeting a "petchem intensity" of 15% by 2030 (IOC Q4 FY25 concall). A rising petchem share is one of the few structural improvements a refiner can make; a collapsing global polymer spread can also quietly erase a segment's profit while fuel looks fine.

The Russian-crude discount

How much of a company's crude comes from discounted Russian barrels — a post-2022 sourcing edge that has added real dollars to Indian GRMs. It matters because it is a margin lever the company does control, and it can reverse if sanctions or politics tighten. Where to find it: the call, as a percentage of the crude basket. IOC's Russian share ran around 19% in Q2 FY26, vs a 22–25% basket earlier (IOC concalls), while BPCL guided 30–32% (BPCL Q4 FY25 concall). Treat this as a margin tailwind that is borrowed, not earned — model what the GRM looks like if the discount narrows.

How do you value an oil and gas company?

This is where most investors lose money, and the error is mechanical: they slap one P/E on a business that is really four businesses with four different multiples.

A pure refiner-marketer and a pure conglomerate should not trade alike, and the market knows it. Look at the spread. Indian Oil trades at a P/E of about 4.87x and below book at 0.94x (Screener.in, FY26); ONGC at 7.13x and 0.80x book (Screener.in, FY26) — both priced as cyclical, capital-heavy, state-controlled commodity businesses. Reliance trades at 22.9x earnings and nearly 2x book (Screener.in, FY26). Reliance is not a refiner being valued at 5x; it is a sum of parts where the market prices Jio and Retail separately from O2C, and the refining business is only one slice. You cannot value an integrated energy company on a single blended multiple — you have to break it apart.

So use two lenses.

Sum-of-the-parts (SOTP) values each segment on the multiple appropriate to it: the refining-marketing business on EV/EBITDA, the upstream on a reserve-or-cash-flow basis, the petchem on its own EV/EBITDA, and the non-energy units (telecom, retail, city gas) on whatever their sector deserves. Add them, subtract net debt, and you get a value the blended P/E will never give you. For Reliance the gap between a "refiner multiple" and the SOTP is the entire investment case; ignore it and you mis-price the stock by a multiple of itself.

EV/EBITDA on normalised, mid-cycle margins. For the refining piece, the cleaner multiple strips out capital structure and accounting noise — but it must be read against a through-cycle GRM, never the peak. BPCL's GRM ran from $4.88 to $13.25 in six months (BPCL Q1 and Q3 FY26); capitalise that $13.25 as if it lasts forever and you have valued a peak as a perpetuity. The discipline is to ask what each barrel earns in an average year across the cycle, multiply by throughput, and value that. The fact that IOC and ONGC trade below book is itself a clue — the market is pricing trough conditions, which can be the opportunity or the warning depending on where the cycle actually is.

The owner's frame: don't ask "is this cheap on this year's earnings?" Ask "what does each segment earn in a normal year, what multiple does each deserve, and what am I paying for the mid-cycle sum once I net out the debt?"

A worked case: BPCL and a GRM guidance that the cycle ignored

The cleanest way to feel why you never capitalise a refining margin is to watch one get guided, missed, and then overshot — all within a year. At its Q4 FY25 call, BPCL's management was asked where GRMs were heading and offered a steer: "Even if we assume the spreads will continue at the same level, one can safely assume $7 to $9 range of GRMs" (BPCL Q4 FY25 concall). It was a reasonable, caveated number from people who run the refineries. (Illustration, not a view on the stock; figures as reported by the company.)

Now trace what crude actually did. The very next quarter, GRM came in at $4.88/bbl — "Gross Refining Margin (GRM) for Q1 FY26 declined to $4.88 per barrel" (BPCL Q1 FY26 concall), well below the bottom of the guided range. Two quarters after that, it had vaulted to $13.25/bbl (BPCL Q3 FY26 investor presentation), well above the top. The guidance wasn't dishonest; it was simply overwhelmed by a variable — global product cracks — that no refiner controls. An investor who anchored on "$7–9, safely" and modelled it as a steady stream would have been wrong in both directions inside three quarters.

Trace the incentive before you trust any margin steer: management is paid to project competence and continuity, so the natural guidance is a smooth, defensible band — never "we have no idea, it depends on cracks." The honest reading of a GRM guidance is not "this is what they'll earn" but "this is the mid-point they think is defensible today." The operating facts that actually are in management's hands tell a steadier story: BPCL ran the highest GRM among PSU refineries at $6.82/bbl in FY25 with an 84.33% distillate yield (BPCL FY25 investor presentation), at 115% utilisation, while lifting spot-crude procurement from 30% in FY19 to 45–50% (BPCL FY25 investor presentation) to chase discounted barrels. Those — yield, utilisation, sourcing flexibility — are the durable edges. The quarterly GRM is the weather.

You only see the said-versus-did pattern by tracking each commitment against the quarter it was made — which is the entire job of Promise Tracker, and the kind of thing nobody reconstructs by re-reading four transcripts by hand.

Red flags specific to an oil and gas company

• A headline GRM quoted without the inventory adjustment. A reported margin can be flattered by an inventory gain or crushed by a loss, as IOC's $2.95 vs $6.60 showed. Always demand the normalised number; if management only quotes the flattering one, assume the other exists.
• A peak GRM treated as permanent. A $13/bbl quarter is the cycle, not the company. Capitalising it as a perpetuity is the single most expensive error in the sector.
• Margin leaning on the Russian discount. A GRM propped up by discounted crude is borrowed margin. Model what it looks like if the discount narrows — because sourcing edges set by geopolitics don't last on your schedule.
• Under-recovery with no clarity on compensation. Regulated LPG and fuel losses, like HPCL's ₹503 crore quarterly under-recovery (HINDPETRO Q3 FY26 concall), can sit on the books for quarters before any subsidy arrives — or never arrive at all. Treat the compensation owed as a contingency, not a receivable.
• Falling upstream production dressed up by a high crude price. For an explorer, flat or declining volumes mean the business is shrinking even when a crude spike makes the P&L look fine. Read production and realisation separately.
• A blended multiple on an integrated company. Valuing Reliance like a refiner, or an OMC like a growth stock, mis-prices the whole thing. If you can't build the SOTP, you can't value it.

Frequently asked questions

A repeatable workflow

1. Split the company into its segments. Upstream, refining, marketing, petchem, gas, non-energy. A blended number hides which engine is running.
2. Read normalised GRM over reported, over time. Six to eight quarters from the deck; demand the inventory adjustment; one quarter is the weather, the trend is the refiner.
3. Check throughput and utilisation. Is the plant running hot, and is new capacity arriving into strong or weak cracks?
4. Read upstream realisation against production. For explorers, falling volumes at a high crude price still mean a shrinking business.
5. Test the margin without the Russian discount and net out the under-recovery. Strip the borrowed margin; treat regulated losses as contingencies.
6. Value on SOTP and mid-cycle EV/EBITDA, never a peak GRM. Each segment on its own multiple, summed, less net debt.
7. Audit the guidance. Check the GRM, production and capex commitments against what actually happened next.

Inve's KPI Screener lines up GRM, throughput, utilisation, Russian-crude share and under-recovery across the oil majors — value, trend and a data-confidence flag per number — so the deck-mining takes minutes, not an afternoon of PDFs. For a sibling cyclical read in a different shape, see how to analyse a steel company, where the spread is coking coal, not crude; or how to analyse an NBFC, where it's interest.

Where this lens can be wrong. The strongest case against everything above is that the variable this whole guide leans on — the crude price, and the product cracks that flow from it — is set by OPEC, geopolitics and global demand that no analyst can forecast. You can read normalised GRM, utilisation, the Russian discount and the SOTP perfectly and still be blindsided by a Middle East shock, a sanctions reversal, or a domestic price freeze ordered for political reasons. Reading the segment numbers tells you whether a company is built to survive and compound through a cycle — a refinery that runs hot, a flexible crude basket, a rising petchem mix, a balance sheet that funds growth. It does not tell you when cracks turn, and at the trough even the best refiner earns little. The honest claim is narrower than it looks: this analysis lowers your odds of capitalising a peak margin and raises your odds of owning a durable, well-sourced operator into the next up-leg. It cannot time the cycle, and a state-controlled energy company can run a fine operation and still be told to absorb a subsidy loss for the public good.

The owner's question to sit with before buying any oil and gas stock: across a full cycle — not this quarter's GRM — what does each barrel this company refines, lifts and sells actually earn, what is each of its businesses worth on its own merits, and is the balance sheet (and the relationship with the government that prices its fuel) strong enough that it is still investing and gaining share when cracks finally turn? If the answer leans on this quarter's fat refining margin holding forever, you have read the weather, not the business.

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