Oil & Gas - Q3FY12 Results Preview - Problems aplenty - Lower GRMs and KG D6 gas output - Centrum

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Q3FY12 Results Preview

Oil & Gas

Problems aplenty - Lower GRMs and KG D6 gas output, higher under-recoveries and spot LNG prices, rupee depreciation to impact Q3FY12

Although crude oil prices remained more or less stable during Q3FY12, the sector faced a spate of problems which are likely to drag down the Q3 performance of oil and gas sector companies. In this quarter GRMs (Reuters Singapore complex) slipped to about US$4/bbl, KG D6 output declined below 40mmscmd, spot LNG prices remained high at about US$15-18/mmbtu and rupee hit a bottom of Rs53/US$. Moreover under-recoveries are likely to be over Rs360bn. Rupee depreciation is likely to hit oil and gas companies the hardest among others. We believe the quarter will be the worst for most companies excluding Cairn (rupee depreciation benefit), PLNG and GSPL (stable volumes for both).

m  Crude remains at about US$110/bbl: Brent crude prices hit over US$117/bbl in mid-November but then receded and averaged US$109.3/bbl during Q3FY12. Crude declined post OPEC meeting which concluded with an upwardly revised quota of 30mbpd and since has been trading at about US$110/bbl. Although (based on media reports) Libyan crude production has increased to about 0.8mbpd, it did not have any serious impact on crude prices.

m  GRMs take a hit: Reuters Singapore Complex GRMs averaged at US$7.9/bbl during Q3FY12. GRMs were badly hit due to the sudden decline in Gasoline-Crude cracks which went as low as US$0/bbl and even Jetkero-Crude, Naphtha-Crude cracks remained under pressure. Domestic refiners are likely face challenges during Q3FY12.

m  Rupee depreciation escalates Q3 under-recoveries: Although most petroleum product prices (international) remained under pressure during the quarter, rupee depreciation impacted under-recoveries which are expected to be about Rs360bn.

m  Marginal changes in target prices due to change in crude estimate and rupee-dollar exchange rate for FY13E: We have revised our crude price assumption from US$100/bbl to US$104/bbl and rupee-dollar exchange rate from Rs46/US$ to Rs48/US$ for FY13E. Incorporating these changes we have revised our estimates for our oil and gas universe with some changes in our target prices.