India Oil & Gas - Crude cut Switch from Cairn India to OMCs :Macquarie Research,

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India Oil & Gas - Crude cut
Switch from Cairn India to OMCs
Event
 Macquarie’s global head of oil & gas, Jason Gammel, has lowered his energy
commodity price forecasts to approximately forward-strip levels through 2013,
resulting in cuts of 7% in FY12E and 20% in FY13E Brent crude assumptions,
to US$ 108/bbl and US$ 97/bbl respectively.
Impact
 Weak economic indicators force oil price cut: The relative resilience in
Brent oil prices has eroded over the last three weeks as the OECD economic
outlook grows murkier and the flight to the US$ accelerates. While we still
expect robust oil demand growth in the non-OECD, we no longer have
confidence that scarcity pricing will be necessary to balance the market. Our
increasingly negative outlook on OECD demand (and the US in particular) has
loosened our forward supply/demand balances and we expect spare capacity
to hover near 5% of demand through 2013. We drop our Brent price
assumptions to US$98/bbl in CY12 (-18%) and to US$95/bbl in CY13 (-20%).
For more details please refer to Jason’s note (Link)
 Cairn India – Losing steam: With the Vedanta takeover almost complete
after acceptance of the value-eroding pre-condition of making royalty cost
recoverable, recurring profits will be hit prospectively. Further, a one time loss
of US$380mn due to reversion of a royalty paid by ONGC on its behalf would
hit Cairn’s FY12E bottomline hard. We cut our FY12-14E PAT by 10-14% and
TP by 7% to Rs 260. However, the stock has fallen 13% in the last fortnight
(and 26% in the last 6m); hence we have upgraded it to Neutral. (see Link)
 Oil Marketing Cos biggest gainers: We estimate that total under-recoveries
(subsidies) would fall by ~3% for FY12 (to Rs1100bn) and ~47% for FY13E
(to Rs565bn) due to lower oil prices, based on current prices and tax
structures. The ballooning of balance-sheets (from working capital borrowings
on account of delayed reimbursements by the fiscally-stretched Government)
is expected to alleviate due to lower crude prices. While improved earnings
may not materialise immediately as the govt benefits the maximum from a
reduction in subsidy, and reimposes import duties and/or cuts retail prices in
such a scenario; the overhang of uncertainty in subsidy sharing and shortterm
interest costs would be reduced to a large extent. Importantly, diesel
deregulation possibilities could emerge. We rate HPCL/BPCL as top picks.
 GAIL’s converter businesses to be impacted: The realizations of LPG and
Petrochemicals (which GAIL produces from cheap, fixed price gas) are crude
dependent, and these businesses face margin compression due to lowered
crude prices. We cut GAIL’s FY12E PAT by 2.5%, FY13-14E PAT by 6-7%,
and TP to Rs538 from Rs563 earlier. We maintain our Outperform.
Outlook
 We are positive on defensives HPCL and BPCL as plays on subsidy reduction
through the combination of a decline in crude prices and regulatory action.
Besides, their strategic shift away from the subsidy-ridden marketing business
(to refineries/upstream), should be an earnings kicker (please see our Visit
note for more details). On the other hand, Cairn India is the only crude pureplay
in Asia, and we recommend a switch from it to HPCL/BPCL due to
cooling off in oil prices coupled with the potentially destabilising takeover.