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Oil & Gas sector
Full-fledged fuel pricing reform is unlikely in the face of high
inflation, impending elections and broader socio-political factors
Gas supplies are expected to stay flat in 2011, and Refining and
petrochem margins will remain at mid-cycle levels
Cairn India is our preferred play in the sector
2011 sector outlook
Refining, petrochemical and crude oil
dynamics. We expect refining margins to remain
at mid-cycle levels and inch higher from FY12
onwards as more Japanese capacity closes.
Reliance Industries (RIL) will continue to
command a USD3-3.5/bbl premium over
benchmark Singapore Complex GRM.
Petrochemicals to experience some weakness in
the near term, as capacity commissioned in 2010
stabilises, but improve as demand picks up. Indian
petrochemical margins will face further tightness
as new GAIL and IOC facilities come online.
Under-recoveries here to stay. We expect underrecovery
of INR600-750bn in FY12 if crude
remains in the range of USD80-90/bbl, as we
expect. Our estimate is based on some price
increase in diesel and LPG if crude remains closer
to USD90/bbl. However, we don’t expect
complete de-regulation in diesel. This underrecovery
will be borne 33% by upstream, c15%
by OMCs and the balance by the government.
Gas supply constraints. Indian gas companies
have been expanding capacity, particularly in the
pipeline sector, anticipating greater domestic gas
supply. We believe there is disappointment in
store for these companies near term. We do not
expect LNG to swiftly fill the demand-supply gap
in view of price sensitivity of the anchor customer
segment towards power generators.
2011 top pick
Cairn India, OW, INR360
Our pick in the sector is Cairn India, based on our
reserves analysis which shows 40% potential
upside in the resource base in Rajasthan over what
management has guided. The upside could ensure
replacement of produced reserves for 5-10 years.
Key drivers are increasing crude oil price,
increase in reserve estimates, higher production.
Our valuation of Cairn is essentially the value of
its reserves in Rajasthan, Ravva and Cambay. We
value these reserves on a DCF basis, using a
WACC of 11% and Brent oil price of USD76/bbl,
a 12% discount to Rajasthan crude over Brent.
Every USD10/bbl increase in the Brent oil price
would increase our target price by cINR50.
Catalysts to look for are ramp up in production,
favourable ruling on cess dispute.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Oil & Gas sector
Full-fledged fuel pricing reform is unlikely in the face of high
inflation, impending elections and broader socio-political factors
Gas supplies are expected to stay flat in 2011, and Refining and
petrochem margins will remain at mid-cycle levels
Cairn India is our preferred play in the sector
2011 sector outlook
Refining, petrochemical and crude oil
dynamics. We expect refining margins to remain
at mid-cycle levels and inch higher from FY12
onwards as more Japanese capacity closes.
Reliance Industries (RIL) will continue to
command a USD3-3.5/bbl premium over
benchmark Singapore Complex GRM.
Petrochemicals to experience some weakness in
the near term, as capacity commissioned in 2010
stabilises, but improve as demand picks up. Indian
petrochemical margins will face further tightness
as new GAIL and IOC facilities come online.
Under-recoveries here to stay. We expect underrecovery
of INR600-750bn in FY12 if crude
remains in the range of USD80-90/bbl, as we
expect. Our estimate is based on some price
increase in diesel and LPG if crude remains closer
to USD90/bbl. However, we don’t expect
complete de-regulation in diesel. This underrecovery
will be borne 33% by upstream, c15%
by OMCs and the balance by the government.
Gas supply constraints. Indian gas companies
have been expanding capacity, particularly in the
pipeline sector, anticipating greater domestic gas
supply. We believe there is disappointment in
store for these companies near term. We do not
expect LNG to swiftly fill the demand-supply gap
in view of price sensitivity of the anchor customer
segment towards power generators.
2011 top pick
Cairn India, OW, INR360
Our pick in the sector is Cairn India, based on our
reserves analysis which shows 40% potential
upside in the resource base in Rajasthan over what
management has guided. The upside could ensure
replacement of produced reserves for 5-10 years.
Key drivers are increasing crude oil price,
increase in reserve estimates, higher production.
Our valuation of Cairn is essentially the value of
its reserves in Rajasthan, Ravva and Cambay. We
value these reserves on a DCF basis, using a
WACC of 11% and Brent oil price of USD76/bbl,
a 12% discount to Rajasthan crude over Brent.
Every USD10/bbl increase in the Brent oil price
would increase our target price by cINR50.
Catalysts to look for are ramp up in production,
favourable ruling on cess dispute.
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