Oil & Gas Falls to Record Low in Mutual Fund Portfolios Amid Growth Doubts

Oil & Gas Falls to Record Low in Mutual Fund Portfolios Amid Growth Doubts​

The oil and gas sector has seen a significant reduction in allocation among top mutual funds, reaching a record low as of May. This makes it the most under-owned sector compared to its representation within benchmark indices.

Mutual fund managers are maintaining caution regarding the long-term growth trajectory of the sector. Despite recent positive shifts in prospects for certain segments, many fund houses remain wary about overall capital allocation efficiency across much of the industry.

Sector Weight Drops to 5.2% in Top Mutual Fund Portfolios​

Data compiled by Motilal Oswal indicates that the oil and gas sector represented 5.2% in the portfolios of the top 21 domestic mutual funds. This marks a decline of 100 basis points from a year ago, establishing the lowest level among available data.

This allocation is notably lower than the 7.8% representation held by the sector in the BSE 200 index. The underweight positioning underscores that most investors are not yet translating potential commodity benefits into increased stock holdings.

Around 19 of the top 21 fund houses were observed to be underweight on the oil and gas sector. Amid this cautious sentiment, capital flowed into other sectors like healthcare and capital goods. Capital goods saw its weight rise to a 23-month high of 8.1%, while healthcare climbed to 7.8%.

Divergent Outlook Drives Underweight Stance in Oil & Gas Sector​

Fund managers express concern over the differential growth outlook across various segments within the oil and gas value chain. This complexity is leading to selective investment rather than broad sector allocation.

Chirtsy Mathai of Quantum Mutual Fund stated that their fund house remains broadly underweight, favoring businesses with clearer long-term growth visibility extending at least three years out. He noted that while oil marketing companies looked attractive during recent crude price spikes, the opportunity was largely cyclical and not structural.

Mr. Mathai explained that although many oil and gas companies generate substantial cash flows, a significant portion of this capital is reinvested into projects within petrochemicals where profitability remains uncertain. They remain positive on city gas distribution (CGD) companies due to government initiatives promoting natural gas usage over LPG.

Dikshit Mittal, Senior Fund Manager- Equity at LIC Mutual Fund, mirrored this cautious view. He noted that forecasting earnings with certainty in the downstream segment is challenging given the volatile geopolitical and regulatory environment. They favor businesses with a clear two to three year earnings visibility.

Performance of Key Stocks Reflects Investor Concern​

The reduction in sector exposure was also reflected through declining mutual fund holdings in several key companies during May. Mutual fund holdings in ONGC declined 9.1% month-on-month, while Reliance Industries saw the value of their holdings fall 4%, despite funds increasing their ownership during the period.

However, a few firms maintain concentrated bets within specific niches. Quant Mutual Fund and SBI Mutual Fund recorded higher allocations at 7.9% and 7.4% respectively among the top fund houses. Motilal Oswal Mutual Fund maintained the lowest exposure at 1.4%.

Opportunities Emerge in Downstream and Gas Sectors​

Brokerages like Nomura and ICICI Securities have highlighted specific beneficiaries of lower crude prices. Oil marketing companies, such as Indian Oil Corp, Bharat Petroleum Corp, and Hindustan Petroleum Corp, are expected to gain from improved marketing margins and reduced fuel and LPG under-recoveries.

City gas distributors (CGD) and LNG-linked companies like Petronet LNG are also seen as potential beneficiaries of improved fuel availability and lower gas costs. This is particularly true as expectations rise for a potential reopening of the Strait of Hormuz.

Nomura forecasts that oil prices could gradually soften toward $70 a barrel in the coming months, contingent on the geopolitical risk premium unwinding, increased OPEC+ supplies, and the easing of sanctions against Iran.

Value Chain Determines Sector Fortunes​

Ultimately, the sector's future fortunes appear highly dependent on where companies are positioned within the value chain. While downstream and gas-focused businesses stand to gain from declining energy costs, upstream producers such as ONGC and Oil India may face pressure due to lower oil and gas realization prices.