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Oil & Gas
A sharp depreciation in the rupee and continued strength in crude prices
will boost the subsidy burden, hitting earnings for OMCs. Though upstream
PSUs would also be hit by the subsidy, they will likely still report marginal
earnings growth due to rupee depreciation boosting their crude and gas
realizations. Decline in KG D6 gas output will result in rise in LNG imports
and continued strength in marketing margins, benefiting PLNG. Refining
margin sees a decline due to slowdown in global oil demand growth.
Rupee depreciation to hit OMCs, upstream PSUs resilient: The sharp 12%
QoQ and 14% YoY depreciation in the rupee and continued strength in crude
price have boosted fuel under-recoveries to `333bn in 3QFY12 (`214bn in
2QFY12 and `158bn in 3QFY11). High subsidy burden and rising interest cost will
continue to hit OMCs, though they would have some relief owing to Government’s
compensation of `300bn for the 1HFY12 subsidy. Though upstream PSU
companies will also be hit by the high subsidy burden, they will still report
marginal earnings growth due to rupee depreciation boosting their crude and gas
realizations. We expect ONGC and Oil India to report US$53/bbl and US$58/bbl
of net crude realization, assuming 40% subsidy burden for upstream PSUs. ONGC
would also benefit from the one-time income of `25bn arising from royalty
adjustment for Cairn Rajasthan block. Cairn India’s PAT will continue to grow
owing to an increase in crude realization due to rupee depreciation.
Decline in KG D6 gas to boost LNG imports: Decline in KG D6 gas production
would continue to work in favour of Petronet LNG in terms of higher regasification
volumes and strong marketing margin for its spot cargoes; hence it is expected to
report robust YoY profit growth. Gas transmission volumes of GAIL and GSPL
would continue to be flat QoQ due to the decline in RIL’s KG gas production,
though offset by an extent owing to higher LNG imports.
Refining margin under pressure: RIL’s earnings growth is expected to be
negative due to lower refining and petchem margins, decline in gas output and
reduction in E&P EBIT due to transfer of 30% stake in its E&P portfolio to BP.
Reuter’s Singapore Dubai GRM during 3QFY12 stood at US$8.0/bbl, down from
US$9.2/bbl in 2QFY12 and US$5.5/bbl in 3QFY11. We expect RIL’s GRM to be
lower than regional GRMs by US$1-US$1.5/bbl due to a decline in light-heavy
crude spread, sharp decline in propylene, LPG and gasoline margins, usage of
high-cost LNG and RIL not benefiting meaningfully by strength in fuel oil cracks.
Ambit v/s consensus
Our FY12 earnings estimates for ONGC/GAIL is 10%-15% lower than consensus
as we have conservatively factored in 40% subsidy share for upstream PSUs. We
are slightly higher than consensus on PLNG due to expectation of higher regas
volumes. But our earnings for GSPL are ~9% lower than the street due to our
assumption of flattish transmission volume and significant cut in transmission tariff.
Recommendation
PLNG’s competitive positioning in the regasification business based on its
proactive capacity expansion makes PLNG our top sector pick. The bleak outlook
for domestic gas production over the next 3-4 years, rising demand for gas due to
its cost competitiveness versus liquid fuels, and expanding gas pipeline network,
paint a picture perfect for PLNG. We are positive on GAIL due to its monopoly
status and defensive earnings while negative on GSPL, as the firm is exposed on
multiple fronts. We continue to like ONGC as a long term defensive story given its
attractive valuations, though the stock could come under pressure over next 3-4
months if the Government parks a higher subsidy burden on the upstream PSUs
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Oil & Gas
A sharp depreciation in the rupee and continued strength in crude prices
will boost the subsidy burden, hitting earnings for OMCs. Though upstream
PSUs would also be hit by the subsidy, they will likely still report marginal
earnings growth due to rupee depreciation boosting their crude and gas
realizations. Decline in KG D6 gas output will result in rise in LNG imports
and continued strength in marketing margins, benefiting PLNG. Refining
margin sees a decline due to slowdown in global oil demand growth.
Rupee depreciation to hit OMCs, upstream PSUs resilient: The sharp 12%
QoQ and 14% YoY depreciation in the rupee and continued strength in crude
price have boosted fuel under-recoveries to `333bn in 3QFY12 (`214bn in
2QFY12 and `158bn in 3QFY11). High subsidy burden and rising interest cost will
continue to hit OMCs, though they would have some relief owing to Government’s
compensation of `300bn for the 1HFY12 subsidy. Though upstream PSU
companies will also be hit by the high subsidy burden, they will still report
marginal earnings growth due to rupee depreciation boosting their crude and gas
realizations. We expect ONGC and Oil India to report US$53/bbl and US$58/bbl
of net crude realization, assuming 40% subsidy burden for upstream PSUs. ONGC
would also benefit from the one-time income of `25bn arising from royalty
adjustment for Cairn Rajasthan block. Cairn India’s PAT will continue to grow
owing to an increase in crude realization due to rupee depreciation.
Decline in KG D6 gas to boost LNG imports: Decline in KG D6 gas production
would continue to work in favour of Petronet LNG in terms of higher regasification
volumes and strong marketing margin for its spot cargoes; hence it is expected to
report robust YoY profit growth. Gas transmission volumes of GAIL and GSPL
would continue to be flat QoQ due to the decline in RIL’s KG gas production,
though offset by an extent owing to higher LNG imports.
Refining margin under pressure: RIL’s earnings growth is expected to be
negative due to lower refining and petchem margins, decline in gas output and
reduction in E&P EBIT due to transfer of 30% stake in its E&P portfolio to BP.
Reuter’s Singapore Dubai GRM during 3QFY12 stood at US$8.0/bbl, down from
US$9.2/bbl in 2QFY12 and US$5.5/bbl in 3QFY11. We expect RIL’s GRM to be
lower than regional GRMs by US$1-US$1.5/bbl due to a decline in light-heavy
crude spread, sharp decline in propylene, LPG and gasoline margins, usage of
high-cost LNG and RIL not benefiting meaningfully by strength in fuel oil cracks.
Ambit v/s consensus
Our FY12 earnings estimates for ONGC/GAIL is 10%-15% lower than consensus
as we have conservatively factored in 40% subsidy share for upstream PSUs. We
are slightly higher than consensus on PLNG due to expectation of higher regas
volumes. But our earnings for GSPL are ~9% lower than the street due to our
assumption of flattish transmission volume and significant cut in transmission tariff.
Recommendation
PLNG’s competitive positioning in the regasification business based on its
proactive capacity expansion makes PLNG our top sector pick. The bleak outlook
for domestic gas production over the next 3-4 years, rising demand for gas due to
its cost competitiveness versus liquid fuels, and expanding gas pipeline network,
paint a picture perfect for PLNG. We are positive on GAIL due to its monopoly
status and defensive earnings while negative on GSPL, as the firm is exposed on
multiple fronts. We continue to like ONGC as a long term defensive story given its
attractive valuations, though the stock could come under pressure over next 3-4
months if the Government parks a higher subsidy burden on the upstream PSUs
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