Upstream PSUs: Bettertimes ahead, Gas Sector
Languishing Further
With softening of crude oil price and diesel price getting partially
deregulated, we expect earnings of Upstream PSUs to accrete in FY14 and
FY15. The earnings could be further enhanced by a domestic gas price hike
which seems to be very likely in the near term. However, we expect Gas
players to continue their weak show on account of availability and
affordability issues amongst core users.
Softening Crude Oil Price and Reforms to Boost the
Earnings of Upstream PSUs
We expect crude oil price to average at $ 105/bl and $ 100/bl with rupee at 54
and 52 in FY14 and FY15 respectively. We have assumed underrecoveries for
diesel to stabilize around Rs 3/liter in FY15. This is likely to come down to
zero as well, however we prefer to stay conservative due to policy
uncertainties. We expect under recoveries to come down to Rs 1140 bn in
FY14 and Rs 970 bn in FY15. Thus we assume 23% and 11% increase in the
netrealizations of ONGC and OilIndia respectively in FY14 YoY
Gas Price Hike on the Anvil: Benefits Reducing
down the Value Chain:
The Oil Ministry has proposed to the Cabinet to approve gas pricing formula
($6.77/mmbtu) recommended by the Rangarajan Committee in order to
incentivize producers without hitting the core consumers adversely. We
expect an increase of Rs. 3/shr and Rs. 4.5/shr in the EPS of ONGC and Oil
India resp. for every $1/mmbtu increase in gas price. Further hike (in
accordance with the demand of producers) could dent the volume offtake
from the core consumers.
Upstream PSUs a Better Bet
We still find Upstream PSUs attractive, looking forward to catalysts in the
form of zero under recovery on diesel; lower LPG and Kerosene losses, and
higher gas price and buoyant volumes. Languishing supplies from domestic
fields and lower demand for expensive RLNG will continue to hit the
earnings of Gas distributors. We assign a BUY rating on ONGC and Oil
India viewing possibility of further rerating, whereas we stay cautious on
Cairn India as outlook for crude oil looks grim. Even though the
fundamental outlook is grim, we assign a HOLD rating on RIL, Gail India,
GSPL, and Gujarat Gas due to cheap valuations. Significant correction in
Petronet LNG gives an opportunity to BUY. We also reiterate BUY rating on
IGL.
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Languishing Further
With softening of crude oil price and diesel price getting partially
deregulated, we expect earnings of Upstream PSUs to accrete in FY14 and
FY15. The earnings could be further enhanced by a domestic gas price hike
which seems to be very likely in the near term. However, we expect Gas
players to continue their weak show on account of availability and
affordability issues amongst core users.
Softening Crude Oil Price and Reforms to Boost the
Earnings of Upstream PSUs
We expect crude oil price to average at $ 105/bl and $ 100/bl with rupee at 54
and 52 in FY14 and FY15 respectively. We have assumed underrecoveries for
diesel to stabilize around Rs 3/liter in FY15. This is likely to come down to
zero as well, however we prefer to stay conservative due to policy
uncertainties. We expect under recoveries to come down to Rs 1140 bn in
FY14 and Rs 970 bn in FY15. Thus we assume 23% and 11% increase in the
netrealizations of ONGC and OilIndia respectively in FY14 YoY
Gas Price Hike on the Anvil: Benefits Reducing
down the Value Chain:
The Oil Ministry has proposed to the Cabinet to approve gas pricing formula
($6.77/mmbtu) recommended by the Rangarajan Committee in order to
incentivize producers without hitting the core consumers adversely. We
expect an increase of Rs. 3/shr and Rs. 4.5/shr in the EPS of ONGC and Oil
India resp. for every $1/mmbtu increase in gas price. Further hike (in
accordance with the demand of producers) could dent the volume offtake
from the core consumers.
Upstream PSUs a Better Bet
We still find Upstream PSUs attractive, looking forward to catalysts in the
form of zero under recovery on diesel; lower LPG and Kerosene losses, and
higher gas price and buoyant volumes. Languishing supplies from domestic
fields and lower demand for expensive RLNG will continue to hit the
earnings of Gas distributors. We assign a BUY rating on ONGC and Oil
India viewing possibility of further rerating, whereas we stay cautious on
Cairn India as outlook for crude oil looks grim. Even though the
fundamental outlook is grim, we assign a HOLD rating on RIL, Gail India,
GSPL, and Gujarat Gas due to cheap valuations. Significant correction in
Petronet LNG gives an opportunity to BUY. We also reiterate BUY rating on
IGL.
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