Please Share:: 
Good time for reforms, not so much for stocks. We revise our estimates for PSU
energy companies while factoring in lower crude prices. We prefer BPCL (upgrade to
BUY) among the PSU energy stocks, as we see the current pessimism on its E&P
business as an opportunity to buy. Lower crude price environment can act as a blessing
in disguise, only if the government is willing to undertake bolder reforms to (1) curb
fuel subsidies substantially and (2) formulate a sustainable subsidy-sharing framework.
�� India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details ��
��
11-20% cut in estimates for OIL and ONGC to factor in lower oil and gas realizations
We have cut our FY2015-17 estimates for OIL and ONGC by 11-20% to reflect lower oil and
gas realizations. We have assumed 40% subsidy burden on upstream companies and the
remaining 60% being compensated by the government in FY2016-17E, which allows US$55-
58/bbl of net realizations versus our earlier assumptions of US$60-63/bbl. ONGC’s profitability
gets further impacted from lower crude oil prices given a significant contribution coming from
(1) oil production from JV fields (including Cairn’s Rajasthan block), (2) value-added products
such as LPG, naphtha, etc. and (3) oil production from overseas fields (OVL). We have also
reduced our assumptions for domestic gas price to US$5.2/mn BTU for FY2016 and US$5.4/mn
BTU for FY2017 versus earlier assumptions of US$5.61/mn BTU. Exhibit 2 shows that correction
in UK NBP prices (stable US Henry Hub and Canada Alberta Hub prices) will lead to a reduction
of about US$0.5/mn BTU in domestic gas price in the upcoming revision for 1HFY16, assuming
Russian domestic gas price (unavailable) and other factors remain largely constant.
8-16% cut in estimates for GAIL to factor in lower LPG and petchem prices
We cut our FY2015-17 estimates for GAIL by 8-16% to factor in lower realizations on LPG and
petchem products. GAIL will not get any respite from lower feedstock prices as it is—(1) largely
using domestic gas for LPG and other liquid hydrocarbons segment, the price of which is
unlikely to reduce much given its linkage to global benchmark gas prices and (2) sourcing LNG
for its petchem segment from RasGas through long-term contract, the price of which is bound
by a five-year rolling average of Japanese crude cocktail and will thus, decline slowly.
Modest revision in FY2016-17 estimates for OMCs to factor in lower oil price and weaker rupee
We have modestly revised our FY2016-17 estimates of BPCL, HPCL and IOCL to factor in
modestly lower interest costs and weaker rupee-dollar exchange rate. Lower crude oil prices will
lead to modest benefit to the downstream companies from lower working capital requirement,
as their interest costs have already reduced significantly in 1HFY15 due to lower fuel subsidies
and timely compensation from the government. On the other hand, potential benefit from
higher marketing margins on auto fuels has been curtailed due to three rounds of increase in
excise duties by the government.
Upgrade BPCL to BUY, as the stock is factoring in concerns on E&P business
We upgrade BPCL to BUY from ADD rating with a revised target price of `800 (`840
previously), as we believe the concerns on BPCL’s E&P business are overdone. We do not rule
out delays in final investment decision for the Mozambique project. However, it may be punitive
to assume abandonment of the project based on short-term crude prices given (1) higher longterm
crude futures trading at US$80/bbl (see Exhibit 3)—14% linkage for LNG will make the
project viable, (2) significance of the project to the Mozambique government, who may provide
necessary fiscal sops, if need be and (3) robust long-term demand of gas from Asian countries.
We cut our rating on OIL to ADD from BUY noting moderate upside to our revised target price
of `615 (`700 previously). Exhibit 1 gives our revision in estimates and target prices for PSU
energy stocks.
LINK
http://www.kotaksecurities.com/pdf/indiadaily/indiadaily08012015ax.pdf
Good time for reforms, not so much for stocks. We revise our estimates for PSU
energy companies while factoring in lower crude prices. We prefer BPCL (upgrade to
BUY) among the PSU energy stocks, as we see the current pessimism on its E&P
business as an opportunity to buy. Lower crude price environment can act as a blessing
in disguise, only if the government is willing to undertake bolder reforms to (1) curb
fuel subsidies substantially and (2) formulate a sustainable subsidy-sharing framework.
�� India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details ��
��
11-20% cut in estimates for OIL and ONGC to factor in lower oil and gas realizations
We have cut our FY2015-17 estimates for OIL and ONGC by 11-20% to reflect lower oil and
gas realizations. We have assumed 40% subsidy burden on upstream companies and the
remaining 60% being compensated by the government in FY2016-17E, which allows US$55-
58/bbl of net realizations versus our earlier assumptions of US$60-63/bbl. ONGC’s profitability
gets further impacted from lower crude oil prices given a significant contribution coming from
(1) oil production from JV fields (including Cairn’s Rajasthan block), (2) value-added products
such as LPG, naphtha, etc. and (3) oil production from overseas fields (OVL). We have also
reduced our assumptions for domestic gas price to US$5.2/mn BTU for FY2016 and US$5.4/mn
BTU for FY2017 versus earlier assumptions of US$5.61/mn BTU. Exhibit 2 shows that correction
in UK NBP prices (stable US Henry Hub and Canada Alberta Hub prices) will lead to a reduction
of about US$0.5/mn BTU in domestic gas price in the upcoming revision for 1HFY16, assuming
Russian domestic gas price (unavailable) and other factors remain largely constant.
8-16% cut in estimates for GAIL to factor in lower LPG and petchem prices
We cut our FY2015-17 estimates for GAIL by 8-16% to factor in lower realizations on LPG and
petchem products. GAIL will not get any respite from lower feedstock prices as it is—(1) largely
using domestic gas for LPG and other liquid hydrocarbons segment, the price of which is
unlikely to reduce much given its linkage to global benchmark gas prices and (2) sourcing LNG
for its petchem segment from RasGas through long-term contract, the price of which is bound
by a five-year rolling average of Japanese crude cocktail and will thus, decline slowly.
Modest revision in FY2016-17 estimates for OMCs to factor in lower oil price and weaker rupee
We have modestly revised our FY2016-17 estimates of BPCL, HPCL and IOCL to factor in
modestly lower interest costs and weaker rupee-dollar exchange rate. Lower crude oil prices will
lead to modest benefit to the downstream companies from lower working capital requirement,
as their interest costs have already reduced significantly in 1HFY15 due to lower fuel subsidies
and timely compensation from the government. On the other hand, potential benefit from
higher marketing margins on auto fuels has been curtailed due to three rounds of increase in
excise duties by the government.
Upgrade BPCL to BUY, as the stock is factoring in concerns on E&P business
We upgrade BPCL to BUY from ADD rating with a revised target price of `800 (`840
previously), as we believe the concerns on BPCL’s E&P business are overdone. We do not rule
out delays in final investment decision for the Mozambique project. However, it may be punitive
to assume abandonment of the project based on short-term crude prices given (1) higher longterm
crude futures trading at US$80/bbl (see Exhibit 3)—14% linkage for LNG will make the
project viable, (2) significance of the project to the Mozambique government, who may provide
necessary fiscal sops, if need be and (3) robust long-term demand of gas from Asian countries.
We cut our rating on OIL to ADD from BUY noting moderate upside to our revised target price
of `615 (`700 previously). Exhibit 1 gives our revision in estimates and target prices for PSU
energy stocks.
LINK
http://www.kotaksecurities.com/pdf/indiadaily/indiadaily08012015ax.pdf
No comments:
Post a Comment