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OIL & GAS
In Q1FY12, Brent crude oil touched a high of USD$128/bbls but later settled
to USD$ 111.4/bbls (30th June '11), which is 7.1% lower from the beginning
of the quarter. However, due to various geo-political issues the crude oil
again surged and is currently trading ~USD$115-120/bbls. Brent crude
throughout the quarter was trading above USD$106/bbls, which is big
positive for private oil exploration companies like Cairn India, etc.
In Q1FY12, Singapore refining margins averaged ~USD$5.2/bbls. We believe
refining companies to declare decent set-of numbers on account of higher
demand and GRMs. However, the fall in the crude oil price at the quarter
end will have marginal negative on the refining companies in the form of
inventory losses, so to that extent GRMs can be muted.
Recently, OMCs have received a cash subsidy of ~Rs 70 Bn to cover losses
incurred in the Q4FY11. They are further expected to get Rs 130 Bn in two
tranches in July'11. The actual payment of cash compensation for Q4FY11
(already accounted in Q4FY11) will improve liquidity and bring down
borrowings to Rs 1 Tn.
The natural gas supply in India was lower due to delay in ramp-up of the
natural gas producti on from KG-D6 by RIL. This will not only negatively
impact the performance of RIL but will also impact gas-utility companies
such as GSPL, GAIL, Gujarat Gas, etc. However, part of the gas volume loss
was compensated by higher import of LNG by PLNG.
Key highlights
We expect upstream companies to report strong growth in revenues in Q1FY12
mainly on account of rise in crude oil prices. Gas utility companies can see some
volume pressure on account of lower domestic natural gas supply. At the same time,
the raw material cost will be higher as part of the gas supplied was costly, imported
LNG which will have negative impact on the profitability margins.
Gas Companies
n Indraprastha Gas (IGL). We expect IGL to show decent volume growth YoY
basis mainly due to major conversion of vehicles to CNG. However on QoQ basis
the volume performance will be flat and the margins are expected to be under
pressure due to sourcing of costlier gas and marginal increase in operating cost.
In Q1FY12, the Company increased CNG selling price by two times which will
partly ring-fence its margins.
n Petronet LNG (PLNG). We expect the Company to show strong volume growth
on QoQ basis mainly on account of higher gas demand and lower KG-6 gas production.
The Company filled the supply-demand gap by importing higher LNG.
n GSPL. We expect GSPL to report de-growth in profits. However, there may be
marginal improvement in volumes in Q1FY12.
Oil & Gas Companies
n Castrol. We expect some pressure on the margins of the Company due to
higher raw material cost as a result of higher crude oil price. However, the Company
would have partly passed on the rise in the raw material cost by increasing
the selling price. Also, the recent hike in retail fuel price by the govt. will lead to
lower retail volume. Along with this slowing economic activity will impact the industrial
lubricant consumption.
n Cairn India Ltd. We expect, CIL to report strong top line growth on QoQ and
YoY basis both on account of volume and realization growth. Cairn India is a
private exploration company so it will reap full benefits of rising crude oil prices.
However, due to delay in getting approvals from JV partners and other stake
holders for additional production from Rajasthan block the production will be suppressed
to that extent.
The government of India has finally granted approval to Vedanta group to acquire
majority stake in Cairn India but with certain key conditions which includes
1). Royalty being cost recoverable for Barmer field in Rajasthan and 2) CIL withdraws
the arbitration dispute related to cess. Now, Cairn India board has to
evaluate the deal along with these conditions and take the final view. Per se, we
expect the deal to sail through but there will be some delay due to procedural
issues. As mentioned, royalty will be cost recoverable and it will be from retrospective
effect. Hence, there will be one-time impact on the profitability and
cash-flow of the Company. However, we have not considered the impact of royalty
in this quarter as we are expecting some delay in final approval.
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