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OIL & GAS
Improving quarter: Q3FY11 Result Preview: Edelweiss
Key highlights of the sector during the quarter
WTI crude prices averaged USD 84.3/bbl (up 11% Q-o-Q and Y-o-Y) in Q3FY11.
Indian simple GRMs improved to USD 2.6/bbl (USD 1.3/bbl in Q2FY11). GRMs for
complex refiners also improved to USD 11.3/bbl (USD 8.6/bbl in Q2FY11)
increasing the simple-complex spread to USD 8.7/bbl. Product cracks improved
significantly during the quarter with average quarterly under-recoveries at INR
3.6/ltr for diesel, INR 16.1/ltr for kerosene, and INR 229/cyl for LPG. In
petrochemicals, the trend was mixed. Ethylene cracker margins eased
considerably (down 24% Q-o-Q) while polymer margins remained flat. However,
polyester intermediate margins improved 43-89% Q-o-Q due to increase in cotton
prices. Higher polyester (PFY/POY) prices led to expansion in polyester margins.
Result expectations for the sector and stocks under coverage
With crude prices remaining in the higher range and government deferring its
decision on diesel/LPG price hikes, under-recoveries were higher at INR 157 bn
compared to INR 112 bn in the previous quarter. We have assumed upstream,
OMCs (IOCL, BPCL, and HPCL) and GOI share of the total under-recoveries at
33.3%, 66.7%, and NIL, respectively, resulting in loss for OMCs. For RIL, we
expect refining throughput to be lower by 1.4 MMT due to maintenance shutdown
of a CDU unit and GRMs to improve to USD 9.25/bbl on the back of improvement
in diesel and gasoline cracks. O&G contribution is expected to dip with KG-D6 gas
production at 55 mmscmd. Petrochemical margins are likely to improve with
expansion in polyester intermediate margins. ONGC is set to report unexciting
results with higher gross realisation due to rising crude offset by higher subsidy
sharing (~INR 46.9 bn) and a dip in other income. Cairn India is set to deliver
stellar results once again with the Mangala crude production maintained at 125
kbpd (Q2FY11 exit rate). GAIL is expected to report strong quarterly numbers
with marginally higher transmission volumes (117 mmscmd) and strong growth in
petrochemical (on the back of its newly expanded plant at Pata) and LPG
transmission segments.
Outlook over the next 12 months
We recently revised up our FY12 and FY13 crude price estimates to USD 90/bbl
(USD 85/bbl) and USD 95/bbl (USD 90/bbl), respectively. The revision was to
factor in our view of rising crude prices due to reducing spare capacity, robust
growth in demand in emerging economies like China, and increased speculative
activity. Global refining margins have bottomed out and are likely to see a
continuous improvement on the back of higher crude prices. Recent slowdown in
global economy (CY08-10) has led to lower investments in the petrochemicals
industry, implying sustained improvement in margins till CY13 due to rising
demand. We expect a bull market for petrochemicals H2FY12 onwards. With a
positive stand on crude and refining/petchem margins, we believe integrated
players like RIL and pure crude plays like Cairn India will do well in a high crude
environment. Our belief that diesel de-control is unlikely and uncertainty on
subsidy-sharing makes us bearish on oil marketing companies.
Recommendations
Top picks: Cairn India, Reliance Industries.
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