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During 4QFY2011, crude ruled firm hitting a 30-month high
of US $107/bbl, whereas natural gas, which on an average
weakened during 3QFY2011, strengthened during the first and
last month of 4QFY2011 with marginal weakness seen in the
middle of the quarter. Petrochemical margins weakened during
the quarter, following a reduction in cracker margins and
subdued PP margins. However, non-integrated PE margins and
PVC margins improved during 4QFY2011. Refining margins
were higher qoq due to higher middle distillate cracks in Asia.
Crude hits 30-month high, surpasses US $100/bbl
Crude spiked to hit a 30-month high, surpassing the
US $100/bbl mark in the first fortnight of March 2011, on rising
concerns that the revolt against the government (in Tunisia,
Egypt, Libya and Bahrain, among others) may spread to the
other rich and bigger oil-producing countries in the Middle East
and North Africa such as Iran and Saudi Arabia, which may
threaten global oil shipments, causing oil price to surge.
However, efforts by Saudi Arabia to ease the loss of Libyan
supplies by increasing its production output by 500,000 barrels
to 9mnbpd failed to do much towards cooling the rising crude
price. However, after hitting a high of US $105/bbl in the
first fortnight of March, crude remained subdued as the
US Department of Energy reported that total domestic crude
inventories rose above expectations. Also, the sharp drop in
Japanese oil demand following the devastating earthquake and
tsunami caused oil futures to dip below the US $100/bbl mark
during mid-March.
However, towards the second half of March, crude inched up
again as the ongoing air strikes against Libya by the US and
allied forces, coupled with Palestinian rocket attacks against
Israel and unrest in the region, resulted in crude price increasing
further. The quarter ended with crude hitting a high of
US $107/bbl on renewed concerns of Libyan turmoil and a
weaker dollar on expectations that the European Central Bank
will raise interest rates. Consequently, crude price soared
substantially by ~62%, post hitting a 2010 low of US $66/bbl
in May, driven by a faster-than-expected recovery in global fuel
demand and continued optimism of US economic recovery.
Further, fear that continued violence in Saudi Arabia (OPEC's
top producer) could lead to skyrocketing of crude prices is
ensuring crude from not falling, despite it being demand
destructive. Overall, with positive developments taking place,
crude price stood firm in 4QFY2011 at US $85-107/bbl v/s
US $80-90/bbl in 3QFY2011. On an average, crude price rose
by 10.6% qoq in 4QFY2011.
Crude price is now much above US $70-80/bbl, the preferred
level for OPEC. Nonetheless, OPEC is still divided on whether
to hold an emergency meeting to consider raising oil production
due to the disruption of oil supply in Libya. Many OPEC members
claim that there is sufficient supply of oil and there is no need
for a special meeting. In fact, countries such as Venezuela always
believed that a fair price for crude remains near US $100/bbl.
OPEC has not formally changed its output policy since agreeing
on the record cut in December 2008.
On the supply side, as per the IEA's February outlook, OECD
stocks declined sharply by 55.6mnbbl in December 2010 to
2,668mnbbls, reducing the OECD’s inventory surplus to
30.2mnbbls from 45.7mnbbls in November 2010. Thus,
forward demand cover fell from 58.3 days in November 2010
to 57.5 days in December 2010, the lowest since November
2008. However, as per January 2011 preliminary data, OECD
oil stocks rose by 19.8mnbbls. Global oil supply rose by
0.2mnbpd mom to 89mnbpd (highest-ever level) in February
2011 due to increased non-OPEC production to 53.2mnbpd,
up 0.3mnbpd mom, on re-instated Alaskan output. Non-OPEC
supply is expected to average 52.8mnbpd in CY2010, while
CY2011 forecast has been raised by 0.1mnbpd to 53.6mnbpd,
on stronger-than-expected Canadian output. On the other hand,
OPEC crude oil output in February 2011 fell by 95kbpd to
30.05mnbpd mainly on account of the near 200kbpd average
monthly loss of Libyan supply, which was partly offset by higher
output from Gulf states.
On the demand side, on an average, IEA has revised global oil
demand for CY2010 and CY2011 upwards by 120kbpd to
87.8mnbpd (up 2.8mnbpd yoy) and 89.3mnbpd (up 1.5mnbpd
yoy), respectively, on stronger data from non-OECD Asia and
improved economic prospects for OECD North America.
However, the agency, on a cautious note, states downside risks
to its outlook on account of persistent fragilities in advanced
economies and inflationary pressures in emerging countries.
Average gas price recovers, up 10.1% qoq
Natural gas price, which was showing strength at
US $4-4.5/mmbtu in the latter part of 3QFY2011 after hitting
a low of US $3.2/mmbtu in October 2010, continued to rule
strong and touched a 4QFY2011 high of US $4.73/mmbtu in
January 2011. Post that, natural gas price gave up its upward
momentum and fell below the US $4/mmbtu mark towards
mid-February 2011 (hitting a low of US $3.7/mmbtu in March
2011), as above-normal temperatures largely prevailed
throughout the US. Increased production from North American
shale formations is also pressuring natural gas prices and the
overhang is expected to continue. Currently, natural gas price
is hovering around US $4.2/mmbtu. With this, average natural
gas price in 4QFY2011 stood at US $4.17/mmbtu, up 10.1%
qoq, due to firm price in the first half of 4QFY2011.
Spot LNG price during 4QFY2011 was higher qoq, aided by
concerns that global LNG supplies will become tighter as Japan
tries to restore lost power due to the earthquake and tsunami.
However, should the outages continue for an extended period
at the nuclear power stations in the affected region, Japan is
expected to become more reliant on LNG spot cargoes. Despite
higher demand, the market is expected to remain amply
supplied in CY2011 as new production in Russia, Yemen,
Indonesia and Qatar come on stream. Thus, we do not expect
spot LNG prices to run up from current levels.
Refining margins improve, petchem dips
Polyethylene and polypropylene prices decreased relatively
higher than naphtha, thus decreasing polymer cracks qoq.
However, polyester prices added to average global petchem
margins due to tighter cotton market. Demand supply imbalance
resulted in a spurt in cotton prices, benefiting the relatively
cheaper polyester producers. The cotton markets are expected
to remain tight in the coming quarters, leading to a sustainably
high polyester demand.
During 4QFY2011, gross refining margins are expected to
improve due to increased middle distillate cracks in Asia. Higher
heating oil demand has led to a spurt in distillate cracks. Besides,
speculations over supply disruptions in the Middle East countries
due to geo-political tensions, have resulted in a demand-supply
imbalance of petro products, thus increasing the cracks. GRMs
are likely to spurt by US $1.5-2/bbl qoq in 4QF20Y11, especially
because distillate cracks are at ~US $18-20/bbl. The Singapore
Dubai complex refining margin is expected to be reported at
~US $6.5/bbl in 4QFY2011. Refineries are also likely to report
significant inventory gains due to the sudden rally in crude price.
Key developments
BP to take over 30% stake in RIL's 23 O&G blocks
RIL and British oil major British Petroleum (BP) announced a
historic partnership between the two companies during
4QFY2011. As per the agreement, BP will buy 30% stake in
RIL's 23 oil and gas blocks, including the giant KG-D6 gas
fields off the east coast, for US $7.2bn, thus valuing the 23
blocks at whopping US $24bn. BP could further pay US $1.8bn
on exploration success, which may lead to development of
commercial discoveries. However, RIL will continue to be the
operator in all 23 blocks. Thus, the JV agreement, valued at
US $9bn, is one of the biggest foreign direct investments in the
country. These payments and combined investment could
amount to US $20bn. Besides this, RIL has also signed a 50:50
JV agreement with BP for sourcing and marketing gas in India.
We believe the deal will benefit RIL as BP is one of the largest
energy majors and one of the finest deepwater exploration
companies in the world. This partnership will combine the
technical expertise of both the companies and will focus on
finding more hydrocarbons in the deepwater blocks of India.
The partnership also meets BP's strategy of forming alliances
with strong national partners, taking material positions in
significant hydrocarbon basins and increasing exposure to
growing energy markets such as India.
Response to NELP-IX better than earlier – PSU oil
majors continue to dominate
Response to NELP-IX must have come as some relief for the
government as bidding for oil and gas blocks received a better
response than that seen under NELP-VIII. Out of the 34 blocks
on offer, 74 bids were received for 33 blocks. Only one offshore
block did not receive any bid. As against this, NELP-VIII saw
bidding for only 36 of 70 oil and gas blocks, with 76 bids
received. Another positive feature in NELP-IX was the return of
RIL (bid for six blocks), which had stayed away from the
NELP-VIII auction. We believe the decent response despite recent
significant changes in tax laws announced in the Budget would
also have been reassuring for the government. Yet, all is not
positive. Participation by international oil majors has again been
minimal with BHP Billiton, BG Group and East West Petroleum
Corp. among the eight foreign bidders. Also, the predominance
of PSU oil and gas companies continued in NELP-IX, with ONGC
bidding for a lion's share (29 blocks). Single bid was received
for 14 blocks, with ONGC along with its partners being the
sole bidder in 10 blocks. A more broad-based participation
would have been a better representative of investor interest.
Oil and gas index outperforms the Sensex
The oil and gas index outperformed (after underperformance
in the previous two quarters) the Sensex by 1.8% during
4QFY2011, backed by relative outperformance by index
heavyweight RIL (-1% vs. the Sensex fall of 5.2%). After a fall
below the `900 mark in early February 2011, RIL's share price
registered smart gains on announcement of BP buying a 30%
stake in RIL’s E&P blocks and on expectations of the company
reporting higher refining margins due to higher middle distillate
cracks in Asia. However, the substantial increase of 10.6% in
average crude price, resulting in mounting under recoveries
and reducing chances of any further deregulation reforms, has
proved to be a spoilsport for OMCs and upstream PSU
companies. HPCL, BPCL and IOC registered losses of 8.8%,
7.1% and 2.6%, respectively; whereas, ONGC and Oil India
lost 10.3% and 6.6%, respectively. Cairn, however, gained 5.7%
on higher crude price and getting SEBI clearance for the
Vedanta-Cairn Energy deal.
4QFY2011 expectations
ONGC is likely to report a dip of US $2/bbl in net realisation
qoq (US $67/bbl vs. US $69/bbl), despite a spurt of
~US $11/bbl in crude oil price, due to higher subsidy burden
of ~`8,000cr. Besides, we expect ONGC to post higher
recouped cost owing to higher drilling of exploratory wells.
ONGC reported extraordinary income of `1,800cr in
3QFY2011 due to gas pool receipts. Consequent to all the
above, we expect a sequential dip of 25% in the bottom line.
RIL is expected to report higher GRM qoq at around
US $10/bbl (US $9/bbl in 3QFY2011). Higher demand for
heating oil and shutdown of refineries in Japan consequent to
the earthquake resulted in a spurt in petro cracks in the Asian
benchmark indices. It could also be attributed to wider
heavy-light crude oil spread. Polymer margins are expected to
dip slightly on account of reduction in polymer demand due to
higher prices although polyester margins continue to be higher
because of the tighter global cotton market. Higher refining
and petchem margins are expected to more than offset flat
natural gas production (53mmscmd) qoq from KG-D6, resulting
in a 10.2% spurt in the bottom line sequentially.
Cairn, being highly leveraged to crude oil, is expected to benefit
the most from the ~11% spurt in crude price sequentially.
Production from MBA fields is expected to remain stagnant qoq
due to approvals awaited from the JV partners and management
committee for additional production.
GAIL is expected to report flat transmission volumes qoq. Higher
transmission tariff and petchem margins are expected to be
offset by higher subsidy burden, leading to a marginal drop in
the bottom line sequentially.
Overall, companies in our universe are expected to show a
mixed performance for 4QFY2011E .
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
During 4QFY2011, crude ruled firm hitting a 30-month high
of US $107/bbl, whereas natural gas, which on an average
weakened during 3QFY2011, strengthened during the first and
last month of 4QFY2011 with marginal weakness seen in the
middle of the quarter. Petrochemical margins weakened during
the quarter, following a reduction in cracker margins and
subdued PP margins. However, non-integrated PE margins and
PVC margins improved during 4QFY2011. Refining margins
were higher qoq due to higher middle distillate cracks in Asia.
Crude hits 30-month high, surpasses US $100/bbl
Crude spiked to hit a 30-month high, surpassing the
US $100/bbl mark in the first fortnight of March 2011, on rising
concerns that the revolt against the government (in Tunisia,
Egypt, Libya and Bahrain, among others) may spread to the
other rich and bigger oil-producing countries in the Middle East
and North Africa such as Iran and Saudi Arabia, which may
threaten global oil shipments, causing oil price to surge.
However, efforts by Saudi Arabia to ease the loss of Libyan
supplies by increasing its production output by 500,000 barrels
to 9mnbpd failed to do much towards cooling the rising crude
price. However, after hitting a high of US $105/bbl in the
first fortnight of March, crude remained subdued as the
US Department of Energy reported that total domestic crude
inventories rose above expectations. Also, the sharp drop in
Japanese oil demand following the devastating earthquake and
tsunami caused oil futures to dip below the US $100/bbl mark
during mid-March.
However, towards the second half of March, crude inched up
again as the ongoing air strikes against Libya by the US and
allied forces, coupled with Palestinian rocket attacks against
Israel and unrest in the region, resulted in crude price increasing
further. The quarter ended with crude hitting a high of
US $107/bbl on renewed concerns of Libyan turmoil and a
weaker dollar on expectations that the European Central Bank
will raise interest rates. Consequently, crude price soared
substantially by ~62%, post hitting a 2010 low of US $66/bbl
in May, driven by a faster-than-expected recovery in global fuel
demand and continued optimism of US economic recovery.
Further, fear that continued violence in Saudi Arabia (OPEC's
top producer) could lead to skyrocketing of crude prices is
ensuring crude from not falling, despite it being demand
destructive. Overall, with positive developments taking place,
crude price stood firm in 4QFY2011 at US $85-107/bbl v/s
US $80-90/bbl in 3QFY2011. On an average, crude price rose
by 10.6% qoq in 4QFY2011.
Crude price is now much above US $70-80/bbl, the preferred
level for OPEC. Nonetheless, OPEC is still divided on whether
to hold an emergency meeting to consider raising oil production
due to the disruption of oil supply in Libya. Many OPEC members
claim that there is sufficient supply of oil and there is no need
for a special meeting. In fact, countries such as Venezuela always
believed that a fair price for crude remains near US $100/bbl.
OPEC has not formally changed its output policy since agreeing
on the record cut in December 2008.
On the supply side, as per the IEA's February outlook, OECD
stocks declined sharply by 55.6mnbbl in December 2010 to
2,668mnbbls, reducing the OECD’s inventory surplus to
30.2mnbbls from 45.7mnbbls in November 2010. Thus,
forward demand cover fell from 58.3 days in November 2010
to 57.5 days in December 2010, the lowest since November
2008. However, as per January 2011 preliminary data, OECD
oil stocks rose by 19.8mnbbls. Global oil supply rose by
0.2mnbpd mom to 89mnbpd (highest-ever level) in February
2011 due to increased non-OPEC production to 53.2mnbpd,
up 0.3mnbpd mom, on re-instated Alaskan output. Non-OPEC
supply is expected to average 52.8mnbpd in CY2010, while
CY2011 forecast has been raised by 0.1mnbpd to 53.6mnbpd,
on stronger-than-expected Canadian output. On the other hand,
OPEC crude oil output in February 2011 fell by 95kbpd to
30.05mnbpd mainly on account of the near 200kbpd average
monthly loss of Libyan supply, which was partly offset by higher
output from Gulf states.
On the demand side, on an average, IEA has revised global oil
demand for CY2010 and CY2011 upwards by 120kbpd to
87.8mnbpd (up 2.8mnbpd yoy) and 89.3mnbpd (up 1.5mnbpd
yoy), respectively, on stronger data from non-OECD Asia and
improved economic prospects for OECD North America.
However, the agency, on a cautious note, states downside risks
to its outlook on account of persistent fragilities in advanced
economies and inflationary pressures in emerging countries.
Average gas price recovers, up 10.1% qoq
Natural gas price, which was showing strength at
US $4-4.5/mmbtu in the latter part of 3QFY2011 after hitting
a low of US $3.2/mmbtu in October 2010, continued to rule
strong and touched a 4QFY2011 high of US $4.73/mmbtu in
January 2011. Post that, natural gas price gave up its upward
momentum and fell below the US $4/mmbtu mark towards
mid-February 2011 (hitting a low of US $3.7/mmbtu in March
2011), as above-normal temperatures largely prevailed
throughout the US. Increased production from North American
shale formations is also pressuring natural gas prices and the
overhang is expected to continue. Currently, natural gas price
is hovering around US $4.2/mmbtu. With this, average natural
gas price in 4QFY2011 stood at US $4.17/mmbtu, up 10.1%
qoq, due to firm price in the first half of 4QFY2011.
Spot LNG price during 4QFY2011 was higher qoq, aided by
concerns that global LNG supplies will become tighter as Japan
tries to restore lost power due to the earthquake and tsunami.
However, should the outages continue for an extended period
at the nuclear power stations in the affected region, Japan is
expected to become more reliant on LNG spot cargoes. Despite
higher demand, the market is expected to remain amply
supplied in CY2011 as new production in Russia, Yemen,
Indonesia and Qatar come on stream. Thus, we do not expect
spot LNG prices to run up from current levels.
Refining margins improve, petchem dips
Polyethylene and polypropylene prices decreased relatively
higher than naphtha, thus decreasing polymer cracks qoq.
However, polyester prices added to average global petchem
margins due to tighter cotton market. Demand supply imbalance
resulted in a spurt in cotton prices, benefiting the relatively
cheaper polyester producers. The cotton markets are expected
to remain tight in the coming quarters, leading to a sustainably
high polyester demand.
During 4QFY2011, gross refining margins are expected to
improve due to increased middle distillate cracks in Asia. Higher
heating oil demand has led to a spurt in distillate cracks. Besides,
speculations over supply disruptions in the Middle East countries
due to geo-political tensions, have resulted in a demand-supply
imbalance of petro products, thus increasing the cracks. GRMs
are likely to spurt by US $1.5-2/bbl qoq in 4QF20Y11, especially
because distillate cracks are at ~US $18-20/bbl. The Singapore
Dubai complex refining margin is expected to be reported at
~US $6.5/bbl in 4QFY2011. Refineries are also likely to report
significant inventory gains due to the sudden rally in crude price.
Key developments
BP to take over 30% stake in RIL's 23 O&G blocks
RIL and British oil major British Petroleum (BP) announced a
historic partnership between the two companies during
4QFY2011. As per the agreement, BP will buy 30% stake in
RIL's 23 oil and gas blocks, including the giant KG-D6 gas
fields off the east coast, for US $7.2bn, thus valuing the 23
blocks at whopping US $24bn. BP could further pay US $1.8bn
on exploration success, which may lead to development of
commercial discoveries. However, RIL will continue to be the
operator in all 23 blocks. Thus, the JV agreement, valued at
US $9bn, is one of the biggest foreign direct investments in the
country. These payments and combined investment could
amount to US $20bn. Besides this, RIL has also signed a 50:50
JV agreement with BP for sourcing and marketing gas in India.
We believe the deal will benefit RIL as BP is one of the largest
energy majors and one of the finest deepwater exploration
companies in the world. This partnership will combine the
technical expertise of both the companies and will focus on
finding more hydrocarbons in the deepwater blocks of India.
The partnership also meets BP's strategy of forming alliances
with strong national partners, taking material positions in
significant hydrocarbon basins and increasing exposure to
growing energy markets such as India.
Response to NELP-IX better than earlier – PSU oil
majors continue to dominate
Response to NELP-IX must have come as some relief for the
government as bidding for oil and gas blocks received a better
response than that seen under NELP-VIII. Out of the 34 blocks
on offer, 74 bids were received for 33 blocks. Only one offshore
block did not receive any bid. As against this, NELP-VIII saw
bidding for only 36 of 70 oil and gas blocks, with 76 bids
received. Another positive feature in NELP-IX was the return of
RIL (bid for six blocks), which had stayed away from the
NELP-VIII auction. We believe the decent response despite recent
significant changes in tax laws announced in the Budget would
also have been reassuring for the government. Yet, all is not
positive. Participation by international oil majors has again been
minimal with BHP Billiton, BG Group and East West Petroleum
Corp. among the eight foreign bidders. Also, the predominance
of PSU oil and gas companies continued in NELP-IX, with ONGC
bidding for a lion's share (29 blocks). Single bid was received
for 14 blocks, with ONGC along with its partners being the
sole bidder in 10 blocks. A more broad-based participation
would have been a better representative of investor interest.
Oil and gas index outperforms the Sensex
The oil and gas index outperformed (after underperformance
in the previous two quarters) the Sensex by 1.8% during
4QFY2011, backed by relative outperformance by index
heavyweight RIL (-1% vs. the Sensex fall of 5.2%). After a fall
below the `900 mark in early February 2011, RIL's share price
registered smart gains on announcement of BP buying a 30%
stake in RIL’s E&P blocks and on expectations of the company
reporting higher refining margins due to higher middle distillate
cracks in Asia. However, the substantial increase of 10.6% in
average crude price, resulting in mounting under recoveries
and reducing chances of any further deregulation reforms, has
proved to be a spoilsport for OMCs and upstream PSU
companies. HPCL, BPCL and IOC registered losses of 8.8%,
7.1% and 2.6%, respectively; whereas, ONGC and Oil India
lost 10.3% and 6.6%, respectively. Cairn, however, gained 5.7%
on higher crude price and getting SEBI clearance for the
Vedanta-Cairn Energy deal.
4QFY2011 expectations
ONGC is likely to report a dip of US $2/bbl in net realisation
qoq (US $67/bbl vs. US $69/bbl), despite a spurt of
~US $11/bbl in crude oil price, due to higher subsidy burden
of ~`8,000cr. Besides, we expect ONGC to post higher
recouped cost owing to higher drilling of exploratory wells.
ONGC reported extraordinary income of `1,800cr in
3QFY2011 due to gas pool receipts. Consequent to all the
above, we expect a sequential dip of 25% in the bottom line.
RIL is expected to report higher GRM qoq at around
US $10/bbl (US $9/bbl in 3QFY2011). Higher demand for
heating oil and shutdown of refineries in Japan consequent to
the earthquake resulted in a spurt in petro cracks in the Asian
benchmark indices. It could also be attributed to wider
heavy-light crude oil spread. Polymer margins are expected to
dip slightly on account of reduction in polymer demand due to
higher prices although polyester margins continue to be higher
because of the tighter global cotton market. Higher refining
and petchem margins are expected to more than offset flat
natural gas production (53mmscmd) qoq from KG-D6, resulting
in a 10.2% spurt in the bottom line sequentially.
Cairn, being highly leveraged to crude oil, is expected to benefit
the most from the ~11% spurt in crude price sequentially.
Production from MBA fields is expected to remain stagnant qoq
due to approvals awaited from the JV partners and management
committee for additional production.
GAIL is expected to report flat transmission volumes qoq. Higher
transmission tariff and petchem margins are expected to be
offset by higher subsidy burden, leading to a marginal drop in
the bottom line sequentially.
Overall, companies in our universe are expected to show a
mixed performance for 4QFY2011E .
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