Q4FY2012 Oil & Gas earnings preview : Sharekhan Special PDF link

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Q4FY2012 Oil & Gas earnings preview   Key points Brent crude oil's price remains strong; was at $120/bbl in Q4FY2012: During Q4FY2012 the price of Brent crude oil hovered in the range of $110-125 per barrel. The average price of Brent crude oil in Q4FY2012 was $120, which is over 9% higher compared with the price in the previous quarter (Q3FY2012). The crude oil prices have surged largely on account of the geo-political issue in Iran. On a year-on-year (Y-o-Y) basis, the average price of crude oil in Q4FY2012 was higher by around 10%. Hence, the realisation of the end-products of exploration and production (E&P) should replicate the trend. However, the dollar corrected marginally in Q4FY2012 to Rs49.8 as compared with Rs51.3 in Q3FY2012. On account of strong crude oil prices, we expect E&P companies to benefit in terms of better realisation.  Expect correction in GRM: The Singapore gross refining margin (GRM) corrected sharply during the quarter and the average refining margin stood at $4.5 per barrel as compared with $5 per barrel in Q3FY2012. The Singapore GRM contracted on account of a correction in the gasoline crack. Further, the price difference between light and heavy crude oil also declined to $3.6 per barrel from $3.8 per barrel in Q3FY2012. Hence, we expect Reliance Industries Ltd (RIL) to report a GRM of around $6.5 per barrel in Q4FY2012 (as against $6.8 per barrel in Q3FY2012). Hence, we expect the earnings before interest and tax (EBIT) from the refining division to contract by over 18% quarter on quarter (QoQ).  Prices of petrochemicals improved, margin pressure continues: On the back of improved demand for petrochemical products globally, the prices of most of the petrochemical products moved northward during the quarter. Among the various products, the prices of ethylene, propylene, PVC, HDPE and PTA increased by 5% to 18% each. Further, depreciation in the rupee is likely to benefit the manufacturers and partially offset the margin pressure on the petrochemical industry. In case of RIL, we expect its petrochemical division to post a revenue growth of 6% QoQ and 15.3% year on year (YoY). However, we expect the EBIT from the petrochemical division to decline YoY.

Outlook
The strong Brent crude oil price coupled with the rupee's depreciation during the quarter benefited the E&P companies by improving their realisation. Moreover, given the geopolitical issues Brent crude oil price could remain strong in the near term. However, contraction in the Singapore GRM due to a fall in the gasoline crack affected the refining industry. The key monitorables going ahead are GRM and petrochemical margins. 

View and valuation
We retain our estimates for RIL and GAIL. We value RIL following the sum-of-the-parts (SOTP) method at Rs890 and retain our Buy rating on it. We value GAIL at Rs464 based on the SOTP valuation method and retain our Buy rating on the stock.

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