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http://www.kotaksecurities.com/pdf/dmb/MorningInsight10042012.pdf
OIL & GAS
Key highlights
The overall performance of oil and gas companies in Q4FY12 is expected to
be mixed.
In Q4FY12 Brent crude oil prices have increased by 14.89% to $125/bbls
mainly on account of 1). Global supply concerns, 2). Global liquidity and 3).
Dollar index depreciation. Dollar Index has fallen by 1.02% in the period
under-review. However, Indian rupee has appreciated by 4.12% to INR 50.9/
$. The average rupee-dollar rate was 50.3 for the Mar'12 quarter, higher by
1.3% on QoQ basis.
The key beneficiary of higher crude oil prices are the upstream oil
exploration companies. Hence, upstream oil majors such as Cairn India,
ONGC, Oil India and HOEC will see higher realizations. Cairn India remains
our top pick. Higher production from Bhagyam field along with higher
realization will improve Cairn's profitability.
On the other hand, downstream companies i.e. refining and petrochemicals
are expected to witness margin pressure due to lower global demand and
higher raw material prices. However, OMCs’ fate depend on how much the
government compensates for the under-recoveries and retail fuel price hike.
The natural gas industry is expected to see continued pressure as domestic
availability of gas remains tight. Due to limited natural gas availability in
India we can see volume pressure on gas utility companies such GSPL, IGL,
etc. However, PLNG is expected to benefit from fall in the KG-D6 natural gas
supply. It is also expected that around end April'12 the global LNG prices
should cool off partly to seasonality factor and partly due to higher global
supply.
The natural gas supply in India was lower due to decline in natural gas
production from KG-D6. Apart from RIL, it will negatively impact the
performance of 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.
Based on the above mentioned observation, we expect upstream companies
to report strong growth in revenues. 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 leading to negative impact on the profitability.
In the Union Budget 2012-13, GOI has increased the OIDA cess on crude oil
production to Rs4,500/mt from Rs2,500/mt earlier. The earlier revision in
cess happened during the Budget 2006-07. This increase in cess is attributed
to indexation by the government. Although, cess is cost recoverable while
calculating the profit petroleum for the upstream companies, the absolute
impact in earnings would still be substantial. The same will reflect in FY13.
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