Oil and Gas – Positive : Daiwa

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Sector thesis: changing regulatory environment offers upside
We believe the Oil and Gas Sector in India will benefit from a more positive
regulatory environment over the next 12 months. The deregulation of gasoline
was the first step, followed by price rises for gas. We believe the upstream
companies, such as ONGC and Gas Authority of India, are well-positioned to
increase their earnings on the back of these changes. Also, gas demand and
supply in India is a multi-year earnings-growth story and we like plays on the gas
story, ie, GSPL and Petronet.


Structural outlook: three-year view
We believe India’s oil and gas landscape could change significantly over the next
three years. The government is keen to reform the sector: it has taken some major
decisions and others are pending. If the government is able to implement the
changes, the effects are likely to be highly positive for most of the companies we
cover. We expect the refining and petrochemicals environment globally to improve
with a broad-based economic recovery in 2012. This would improve the respective
spreads in these businesses and be positive for Reliance Industries.

We expect the news flow on new oil and gas production in India to increase over
the next few years. Many discoveries that have been announced over the past two
years will enter the development phase and we are likely to see increased visibility
on the reserve potential in these blocks. We believe the key beneficiaries of this
trend will be Reliance Industries and ONGC. We forecast Reliance Industries to
increase its gas production volume from the KG-D6 block over the next three years
to about 90mmscmd from 60mmscmd currently.



Best-positioned: Reliance Industries
We believe there are multiple catalysts that could materialise for Reliance
Industries over the long term. We expect: 1) discoveries off the east coast of India
to translate into reserves and add value, 2) the refining and petrochemical cycle to
turn more favourable, 3) an increase in the visibility on new ventures in power and
telecoms, and 4) a ramp-up in gas production from KG-D6. The stock has
underperformed the BSE Sensex over the past 12-18 months and we believe
investors are significantly underweight.

Worst-positioned: Hindustan Petroleum Corporation
Although the government-owned downstream companies should benefit from
deregulation, we believe their structural disadvantages will adversely affect their
revenue growth. For instance, we expect the private sector to account for a
significant market share once the diesel market is deregulated, resulting in a
potential decline in sales volume for Hindustan Petroleum Corporation (HPCL).
Also, the company’s sales-volume growth visibility in refining is lower than that of
its peers, and its upstream exposure is the lowest.