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UBS Investment Research
India Oil and Gas
L ower crude = OMCs & upstream benefit
Event: Brent has come off to US$ 101.5/bbl (Sept Brent contract)
Oil prices have plunged mirroring the fall in global equity markets. Brent crude is
back to a level not seen since mid-February (pre-Libya). However, five-year Brent
at $96.63/bbl is still above our long-term average forecast of $95/bbl.
Impact: lower subsidy burden on government, upstream companies
We estimate that every US$5/bbl drop in crude prices lowers India’s annual
subsidy burden by Rs188bn. If Brent falls from US$110/bbl to US$95/bbl then
India’s subsidy burden will fall from Rs1,045bn to Rs480bn. Of this, the
government normally bears two-thirds and hence its fiscal position should benefit
by Rs566bn (India’s FY10 fiscal deficit was Rs4,123bn) while the upstream
companies would benefit by Rs188bn.
Action: prefer upstream over downstream companies
We prefer the upstream companies as: 1) we expect FY12 oil prices to average
above US$100/bbl; 2) we do not expect near-term reforms i.e diesel decontrol; 3)
even if reforms happen, the private sector will step in; and 4) the nominal margins
that OMCs make on the sale of diesel will increase only if oil stays below
US$90/bbl, which is below our long-term forecast. We estimate that every
US$5/bbl fall in Brent should improve ONGC’s crude realisation by US$3.64/bbl
and EPS by 5-7.5%. We currently assume ONGC’s FY12 realisation at US$62/bbl.
Top picks: continue to like ONGC and GAIL, and OIL among midcaps
Upstream companies benefit if oil stays between US$95-105/bbl and downstream
benefits if oil stays below US$95/bbl. We have a Buy rating on ONGC, GAIL and
OIL as the three companies benefit from lower subsidy payout as Brent prices fall.
Falling Brent means better realisation for
ONGC
Falling Brent should improve the oil price realisations of ONGC as the subsidy
burden on the company will be lower. We estimate that every US$5/bbl fall in
Brent should improve ONGC’s crude realisation by ~US$3.64/bbl. We currently
assume US$62/bbl in our FY12 numbers for ONGC. There is significant upside
to the number if Brent falls to US$95/bbl and the government maintains the
duties and prices of petroleum products and assigns 38.75% of subsidy to the
upstream companies.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
India Oil and Gas
L ower crude = OMCs & upstream benefit
Event: Brent has come off to US$ 101.5/bbl (Sept Brent contract)
Oil prices have plunged mirroring the fall in global equity markets. Brent crude is
back to a level not seen since mid-February (pre-Libya). However, five-year Brent
at $96.63/bbl is still above our long-term average forecast of $95/bbl.
Impact: lower subsidy burden on government, upstream companies
We estimate that every US$5/bbl drop in crude prices lowers India’s annual
subsidy burden by Rs188bn. If Brent falls from US$110/bbl to US$95/bbl then
India’s subsidy burden will fall from Rs1,045bn to Rs480bn. Of this, the
government normally bears two-thirds and hence its fiscal position should benefit
by Rs566bn (India’s FY10 fiscal deficit was Rs4,123bn) while the upstream
companies would benefit by Rs188bn.
Action: prefer upstream over downstream companies
We prefer the upstream companies as: 1) we expect FY12 oil prices to average
above US$100/bbl; 2) we do not expect near-term reforms i.e diesel decontrol; 3)
even if reforms happen, the private sector will step in; and 4) the nominal margins
that OMCs make on the sale of diesel will increase only if oil stays below
US$90/bbl, which is below our long-term forecast. We estimate that every
US$5/bbl fall in Brent should improve ONGC’s crude realisation by US$3.64/bbl
and EPS by 5-7.5%. We currently assume ONGC’s FY12 realisation at US$62/bbl.
Top picks: continue to like ONGC and GAIL, and OIL among midcaps
Upstream companies benefit if oil stays between US$95-105/bbl and downstream
benefits if oil stays below US$95/bbl. We have a Buy rating on ONGC, GAIL and
OIL as the three companies benefit from lower subsidy payout as Brent prices fall.
Falling Brent means better realisation for
ONGC
Falling Brent should improve the oil price realisations of ONGC as the subsidy
burden on the company will be lower. We estimate that every US$5/bbl fall in
Brent should improve ONGC’s crude realisation by ~US$3.64/bbl. We currently
assume US$62/bbl in our FY12 numbers for ONGC. There is significant upside
to the number if Brent falls to US$95/bbl and the government maintains the
duties and prices of petroleum products and assigns 38.75% of subsidy to the
upstream companies.
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