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Oil & Gas, Petrochemicals
Potential Result Outperformers: ONGC, Reliance
Potential Result Underperformers:
ONGC marker crude Bonny Light up 16% YoY and 13% QoQ at
US$88/bbl: Brent price at US$86.9/bbl is up 16% YoY and 14% QoQ in 3Q
FY11. ONGC’s marker crude Bonny Light at US$88.4/bbl is up 16% YoY in
3Q FY11 from US$76.3/bbl in 3Q FY10. Bonny Light is also up 13% QoQ
vis-à-vis US$78.1/bbl in 2Q FY11.
Singapore complex GRM up 30% QoQ and 186% YoY to US$5.5/bbl: 3Q
FY11 Reuters’ Singapore complex GRM is up 30% QoQ at US$5.5/bbl from
US$4.2/bbl in 2Q FY11. 3Q FY11 Singapore GRM is also 186% YoY higher
from US$1.9/bbl in 3Q FY10. Singapore GRM in 3Q FY11 is in fact the
highest in 9 quarters.
Rupee stronger 4%YoY and QoQ: The rupee has appreciated by 4% YoY
and QoQ to Rs44.8 from Rs46.6 and Rs46.5 in 2Q FY11. A stronger rupee
means lower refining and petrochemical margin in rupee terms. It also means
lower subsidy at the same US dollar denominated oil/product prices
3Q subsidy estimated at Rs168bn up 49% QoQ: We expect LPG and
kerosene subsidy in 3Q FY11 at Rs92bn and subsidy on diesel of Rs76bn.
Thus, the total subsidy in 3Q FY11 is estimated at Rs168bn, which is 49%
QoQ higher but 16% lower than in 1Q FY11.
Upstream to bear one-third of subsidy and government to compensate
R&M companies in 3Q for 50% of 9M subsidy: We have assumed that
upstream companies would bear one-third of 3Q subsidy of Rs168bn. The
petroleum secretary had said in July 2010 that the government would bear
50-67% of FY11E subsidy but in 1H government compensated only 41% of
subsidy. Thus R&M companies had to bear 25% of 1H subsidy. Thus we are
assuming R&M companies to bear 1% of 3Q and 17% of 9M subsidy
Company-wise expectations for the quarter
Reliance Industries (RIL)
29% YoY rise in net profit driven mainly by higher refining EBIT: We
estimate RIL’s 3Q FY11E net profit to be 29% YoY higher at Rs51.7bn. We
expect EBITDA to rise by 25% YoY to Rs98bn and EBIT to rise by 28% YoY to
Rs63bn (depreciation up 22% YoY at Rs34bn). We expect refining EBIT to be up
76% YoY at Rs24.2bn. Refining EBIT jump is expected to be driven by 53% YoY
(14% QoQ) jump in RIL’s refining margin to US$9/bbl vis-à-vis US$5.9/bbl in 3Q
FY10. RIL’s 3Q theoretical margin calculated by us works out to US$9.8-10.4/bbl.
However, we have assumed its margin to be lower at US$9/bbl as even in 1H its
actual margin at US$7.7/bbl was lower than our theoretical margin of US$8-
8.8/bbl. We expect petrochemical EBIT to be up 14% YoY driven by improved
petrochemical product margins. We expect E&P EBIT to be up flat at Rs15bn.
ONGC
Higher gas & net oil price to drive 65% YoY rise in 3Q profit: We expect
ONGC’s 3Q FY11E net profit to be 65% YoY higher at Rs50.3bn. The main
earnings driver would be higher oil and gas price. We expect ONGC’s 3Q oil price
net of subsidy to be 9% YoY higher at US$62.7/bbl and up 5% YoY in rupee
terms. In 3Q FY11 we expect ONGC’s gross oil price at US$88.7/bbl to be 16%
YoY higher but we expect subsidy it has to bear to be 37% YoY higher at
US$26/bbl. We have assumed upstream bears one-third of total subsidy of
Rs56bn with ONGC’s 82% share therein being Rs45.9bn. APM gas price will be
over 100% YoY higher at US$3.8/mmbtu net of royalty (gross price of
US$4.2/mmbtu) vis-à-vis US$1.8/mmbtu in 3Q FY10. We have assumed DD&A
to be 4% YoY lower at Rs45bn in 3Q FY11. As indicated by the management in
the 2Q earnings call, ONGC’s 3Q earnings may be boosted by gas pool arrears
of Rs15bn. In that case, we estimate ONGC’s 3Q profit would be 97% YoY higher
at Rs60.2bn.
Oil India (OIL)
Higher gas & net oil price to drive 53% YoY rise in 3Q profit: We expect OIL’s
3Q profit to be 53% YoY higher at Rs11bn driven by higher oil and gas price. We
expect OIL’s 3Q oil price net of subsidy to be 14% YoY and 6% QoQ higher at
US$67/bbl. OIL will also gain from more than doubling of APM gas price in 3Q
like ONGC..
R&M companies
9M EPS of Rs19.5-29.9 assuming compensation from government of 50% of
9M subsidy: As discussed, we are assuming government compensation to R&M
companies to be 50% of 9M subsidy as against 41% of 1H subsidy accounted in
1H. Thus we are assuming R&M companies getting compensation of Rs167bn
from the government (Rs111bn) and upstream (Rs56bn) as against subsidy of
Rs168bn in 3Q. R&M companies are thus assumed to bear subsidy of just
Rs1.2bn. We have assumed refining margin of US$6.0-8.0/bbl for the 3 R&M
companies in 3Q driven by strong Singapore GRM of US$5.5/bbl and high crude
inventory gains. Based on these assumptions we expect R&M companies’ 3Q
EPS to be Rs12.3-18.2/share and 9M EPS at Rs19.5-29.9.
Gas utilities
GAIL
42% YoY jump in profit driven by rise in gas transmission, LPG EBITDA and
higher other income: We expect GAIL’s 3Q FY11 net profit to be 42% YoY
higher at Rs12.2bn. The jump is expected to be driven mainly by jump in gas
transmission and LPG EBITDA. We expect 118% YoY jump in LPG EBITDA net
of subsidy at Rs3.2bn and 26% YoY rise in LPG transmission EBITDA. LPG
EBITDA rise is expected to be driven by 16% YoY jump in realization and 10%
YoY fall in subsidy to Rs4.1bn in 3Q FY11. We also expect GAIL’s 3Q other
income to jump by 86% YoY driven by special dividend of Rs32/share on its 2.5%
stake in ONGC.
GSPL
19% YoY decline in net profit but 14% YoY higher cash profit: We expect
GSPL’s 3Q FY11 net profit to be 19% YoY lower at Rs939m. We are assuming
flat gas volumes and 6% YoY lower gas transmission tariff. We are assuming
depreciation to be 31% YoY higher due to investment in windmills. Windmill
investment will also reduce current tax and boost cash profit. We expect GSPL’s
3Q cash profit to be 14% YoY higher at Rs2bn.
Petronet LNG
Earnings up 68% YoY driven by 22% YoY higher regas charge and 9% YoY
higher regas volumes: We expect Petronet LNG’s 3Q net profit to be 68% YoY
higher at Rs1.4bn on the low base of 3Q FY10 profit of Rs832m. In 3Q FY10
PLNG was hit by low regas charge on a short term contract. On that low base we
expect 3Q FY11 regas charge to be 22% YoY higher. We also expect 9%YoY
and 4% QoQ higher regas volumes at 104TBTU (2.1mmt).
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