Nomura: 2011 Update: Oil & gas/chemicals

Please Share:: India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��


Oil & gas/chemicals
 Action
For 2011F, we are Bullish on oil, and expect refining margins to be on the uptrend,
and think petchem will enter a golden age. Reliance, an integrated play, will likely
benefit and is our large-cap pick. As clarity emerges on its ownership issue, Cairn
India will re-emerge as a pure oil play. Despite a strong 2010, we remain Bullish on
the gas story, with PLNG as our preferred pick for 2011F, but continue to like GAIL,
GSPL and IGL.
 Catalysts
Continued strength in refining and chemical margins, Early clarity on the govt’s
decisions on the Cairn-Vedanta deal and early easing of pipeline bottlenecks.
Anchor themes
We believe oil prices would strengthen further, driven by QE-2 and improving
demand. As India imports ~80% of its oil needs, higher prices would put pressure
on the economy, and likely derail any plans for further reforms / deregulation.

All eyes on government actions
 Bullish on oil; Bearish on oil PSUs
The weakness in US dollars, abundant money supply and potentially higher
inflation expectations that could come with QE-2, plus strengthening oil
fundamentals could fuel higher oil prices, in our view. We believe oil prices could
reach US$100/bbl in 2011F. Higher oil prices would be positive for Cairn India
and Reliance Industries. Although there are expectations that some positive
action will be taken before the planned equity offering of ONGC/IOC, we think
high oil prices could play spoilsport. The ad-hoc nature and non-transparency of
the entire subsidy mechanism could continue to haunt oil PSUs in 2011F as well.
 All eyes will remain on government actions
Apart from its action on oil sector reforms/de-regulation, the government’s
decision on the Cairn-Vedanta transaction will be keenly watched. Gas price
hikes for nominated blocks were a key positive step by the government in 2010.
There are growing expectations that a more rational pricing methodology would
emerge for pricing of new exploration licensing policy (NELP) gas in 2011F. Also,
the government seems to be contemplating pooling gas prices, which we
continue to believe would be a retrograe step.
 Refining/petchem – strength likely to continue
We believe Asian refining margins are poised for modest gains in 2011F, on
slowing capacity additions and a tightening diesel balance. We see continued
strength in petchem and believe that the sector is poised to enter a golden age,
benefiting from rising demand and restrained capacity additions. Reliance, as an
integrated play, is likely to be a key beneficiary, in our view.
 Gas pipeline bottlenecks to ease – we continue to like gas names
Gas consumption through most of 2010 was constrained by pipeline bottlenecks,
particularly at GAIL’s Hazira-Vijaipur-Jagdishpur (HVJ) system. However, we
expect the situation to ease in 2011F, as GAIL first de-bottlenecks the old Dahej-
Vijaipur pipeline and then commissions a new 48” Dahej-Vijaipur pipeline. With a
delayed ramp-up at the KG-D6 block, and relatively benign global LNG markets,
we think PLNG could surprise in terms of higher LNG imports, once pipeline
bottlenecks ease.