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The Egypt crisis is probably the first ‘big global story’ of 2011. The internal political
issue that is disturbing the social and economical growth of the nation will have direct or
indirect consequences across the globe (due to high crude oil prices).
Crude oil prices have been increasing in recent months due to severe weather
conditions in US and European countries (up by more than 15% since October 2010).
The current unrest in Egypt is likely to further fuel crude oil prices. The experience of
2008 (When crude oil prices touched $147/bbl) shows conclusively that sustained high
oil prices are not in the interest of consumers or producers.
Smooth supply from Suez Canal hints at stable international crude oil price
Egyptian oil and gas production facilities do not appear to be at risk, as they are far from
population centres. While disruption to the Suez passage through the canal and pipeline
could have an significant impact on oil and gas markets (see annexure on Suez Canal &
Suez-Mediterranean pipeline), it does not currently appear likely. As per Suez Canal
authorities, Ahmed El Manakhly, “Ships are passing normally and without delay through the
Suez Canal, even as protests in Egypt continue. The canal is handling 45 to 50 vessels a
day”, a volume that Ahmed El Manakhly described as normal. So based on available data, it
seems that production of crude oil and supply from Suez Canal is running smoothly, without
any hurdles. We believe smooth functioning of the Suez Canal favors stabilization of crude
oil prices at current levels. However, any disruption in Egyptian crude oil supply or
functioning of the Suez Canal may trigger further price hikes.
Negligible impact on India directly….
Due to the recent political crisis trade/business between India and Egypt is getting affected.
But, this is unlikely to have much impact, as India’s import from Egypt as a percentage of its
total imports were just 0.59% in 2010, while export as percentage of its total export was
around 0.79% in 2010. So based on last four years available data, India has a trade deficit
with Egypt (in 2010:- Rs.14bn).
…..But likely impact on India, indirectly
While Indo-Egypt trade is very miniscule to have significant impact on India, the impact of
the current crisis on international crude oil prices, is likely to have a significant bearing on
India. India imports about 80% of its crude requirements. With domestic production
remaining stagnant over the years, any increase in crude oil prices poses a risk of
increasing fiscal deficit by 0.5% in FY12, through higher sharing of under recoveries by the
government. The total gross under-recoveries in the current financial year are expected to
be around Rs. 720bn and are expected to rise further in the next financial year, if crude
trades above $80/bbl. The government and the public sector companies typically share the
losses in a proportion determined by the government every year. However, given the
current inflationary trend in India, higher crude prices are likely to further drive inflation
considering that aviation fuel and petrol, which are important components of the WPI, are
market driven. Moreover, the subsidy bill on diesel and other administered petro products
would also come under pressure and will have to be considered by the government while
presenting the budget this month.
If the political situation in Egypt does not improve in the coming days and any news
pertaining to supply disruption from Egypt and Suez Canal ensues, it will have an adverse
impact on global as well as Indian economy.
However, we believe that in the near term, crude oil prices are likely remain stable based on
A) the smooth functioning of the Suez Canal and Suez-Mediterranean pipeline (Sumed)
which is unaffected as of now and B) Adequate oil inventories in rich countries to cover its
near term demand.
Valuation and recommendation
Though in the last few years, OMC’s have been de-rated due to rising crude oil price and
lack of policy initiatives from the government. Historic evidence suggests that OMC’s have
been re-rated on expectations of policy initiatives, despite increase in the crude oil prices.
We note that in FY03-04, OMC’s P/BV increased from 1.2-1.3x to 2x despite crude prices
increasing from US$30/bbl to US$40/bbl. With the new reform, scenario has changed with
better clarity in policy. Despite that the stock has corrected by 22-28% over the last three
months led by A) correction in the broader market indices and B) rise in crude oil prices led
by severe winter season in US and Europe, and political turmoil in Egypt. However we
believe the recent correction should be looked as an investment opportunity. Currently
OMC’s are trading in the range of 0.8-1.1x FY12E BV looks attractive. We maintain our
BUY rating on HPCL and ACCUMULATE rating on IOCL and BPCL with the target price of
Rs.515, Rs.458 and Rs.805 respectively.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Oil & Gas
|
Crisis continues, but stability in sight
|
n Crude oil prices after showing an increase of 5% post Egypt crisis, seems to be stabilizing at the current level of $ 90/bbl
n Egypt hardly contributes 0.9% and 0.8% of the world crude oil production and consumption respectively
n India’s import from Egypt as a percentage of its total imports were around 0.59%, while export at around 0.79% of its total export, in 2010.
n Smooth supply from Suez Canal hints at stable international crude oil prices
Company
|
Reco
|
CMP (Rs)
|
TP (Rs)
|
HPCL
|
Buy
|
347
|
515
|
IOCL
|
Accumulate
|
322
|
458
|
BPCL
|
Accumulate
|
595
|
805
|
The Egypt crisis is probably the first ‘big global story’ of 2011. The internal political
issue that is disturbing the social and economical growth of the nation will have direct or
indirect consequences across the globe (due to high crude oil prices).
Crude oil prices have been increasing in recent months due to severe weather
conditions in US and European countries (up by more than 15% since October 2010).
The current unrest in Egypt is likely to further fuel crude oil prices. The experience of
2008 (When crude oil prices touched $147/bbl) shows conclusively that sustained high
oil prices are not in the interest of consumers or producers.
Marginal contribution in the International crude oil market
Egypt hardly contributes 0.9% and 0.8% (in 2009) of the world crude oil production and
consumption. Egypt is a marginal net exporter of crude oil. Also, for the last several
years, Egypt’s production has come down significantly from 0.94mmbbl/d in 1994 to
0.74mmbbbl/d in 2009, a decrease of 1.5% CAGR.
The chart below illustrates the share (%) of Egypt in world production of crude oil.
Smooth supply from Suez Canal hints at stable international crude oil price
Egyptian oil and gas production facilities do not appear to be at risk, as they are far from
population centres. While disruption to the Suez passage through the canal and pipeline
could have an significant impact on oil and gas markets (see annexure on Suez Canal &
Suez-Mediterranean pipeline), it does not currently appear likely. As per Suez Canal
authorities, Ahmed El Manakhly, “Ships are passing normally and without delay through the
Suez Canal, even as protests in Egypt continue. The canal is handling 45 to 50 vessels a
day”, a volume that Ahmed El Manakhly described as normal. So based on available data, it
seems that production of crude oil and supply from Suez Canal is running smoothly, without
any hurdles. We believe smooth functioning of the Suez Canal favors stabilization of crude
oil prices at current levels. However, any disruption in Egyptian crude oil supply or
functioning of the Suez Canal may trigger further price hikes.
Negligible impact on India directly….
Due to the recent political crisis trade/business between India and Egypt is getting affected.
But, this is unlikely to have much impact, as India’s import from Egypt as a percentage of its
total imports were just 0.59% in 2010, while export as percentage of its total export was
around 0.79% in 2010. So based on last four years available data, India has a trade deficit
with Egypt (in 2010:- Rs.14bn).
…..But likely impact on India, indirectly
While Indo-Egypt trade is very miniscule to have significant impact on India, the impact of
the current crisis on international crude oil prices, is likely to have a significant bearing on
India. India imports about 80% of its crude requirements. With domestic production
remaining stagnant over the years, any increase in crude oil prices poses a risk of
increasing fiscal deficit by 0.5% in FY12, through higher sharing of under recoveries by the
government. The total gross under-recoveries in the current financial year are expected to
be around Rs. 720bn and are expected to rise further in the next financial year, if crude
trades above $80/bbl. The government and the public sector companies typically share the
losses in a proportion determined by the government every year. However, given the
current inflationary trend in India, higher crude prices are likely to further drive inflation
considering that aviation fuel and petrol, which are important components of the WPI, are
market driven. Moreover, the subsidy bill on diesel and other administered petro products
would also come under pressure and will have to be considered by the government while
presenting the budget this month.
If the political situation in Egypt does not improve in the coming days and any news
pertaining to supply disruption from Egypt and Suez Canal ensues, it will have an adverse
impact on global as well as Indian economy.
However, we believe that in the near term, crude oil prices are likely remain stable based on
A) the smooth functioning of the Suez Canal and Suez-Mediterranean pipeline (Sumed)
which is unaffected as of now and B) Adequate oil inventories in rich countries to cover its
near term demand.
Valuation and recommendation
Though in the last few years, OMC’s have been de-rated due to rising crude oil price and
lack of policy initiatives from the government. Historic evidence suggests that OMC’s have
been re-rated on expectations of policy initiatives, despite increase in the crude oil prices.
We note that in FY03-04, OMC’s P/BV increased from 1.2-1.3x to 2x despite crude prices
increasing from US$30/bbl to US$40/bbl. With the new reform, scenario has changed with
better clarity in policy. Despite that the stock has corrected by 22-28% over the last three
months led by A) correction in the broader market indices and B) rise in crude oil prices led
by severe winter season in US and Europe, and political turmoil in Egypt. However we
believe the recent correction should be looked as an investment opportunity. Currently
OMC’s are trading in the range of 0.8-1.1x FY12E BV looks attractive. We maintain our
BUY rating on HPCL and ACCUMULATE rating on IOCL and BPCL with the target price of
Rs.515, Rs.458 and Rs.805 respectively.
Annexure
Brief on Suez Canal
The Suez Canal used to be a major choke point for crude oil coming from the Middle East
destined for Europe and the US. Currently, Suez Canal and Suez-Mediterranean pipeline
carries about 2.4mmbbl/d and 8% of the global seaborne daily. The Suez Canal is a twoway
street: crude oil and oil products are shipped in both directions: north to the
Mediterranean and south to the Red Sea. The flows almost balance: some 55% of total
shipped oil is Northbound and 45% is Southbound.
Brief on Sumed Pipeline (also called as Suez-Mediterranean pipeline)
The 200-mile Suez-Mediterranean (Sumed) crude oil pipeline connects the Red Sea with
the Mediterranean. Estimated capacity of the Sumed line is some 2.4 mb/d. Throughput at
the end of 2010 was estimated at some 1.1 mb/d, so the pipeline currently has a spare
capacity of some 1.3 mb/d. The pipeline runs from south to north, supplying the
Mediterranean with oil from the Middle East.
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