- Singapore complex GRM was USD6.4/bbl in 1QFY18 v/s USD6.4/bbl in 4QFY17 and USD5.0/bbl in 1QFY17. Reported earnings are likely to remain subdued due to inventory losses during the quarter.
- Average Brent crude price was up 9% YoY but declined 7% QoQ to USD50.2/bbl. While the QoQ decline would impact upstream companies, we expect lower operating costs to benefit them. ONGC and Oil India should see a YoY/QoQ increase in EBITDA.
- RIL would report lower GRM, led by narrowing light-heavy differential. Petchem segment would benefit due to increased HDPE and LLDPE delta.
Brent declined 7% QoQ (grew 9% YoY); upstream subsidy nil in 1QFY18
- Despite the production cut extension taken by OPEC and non-OPEC countries, crude oil prices declined in 1QFY18. The average for the quarter was down 7% QoQ at ~USD50.2/bbl. OMCs are likely to post inventory losses for the quarter.
- We do not build any net under-recovery either for the OMCs or for the upstream companies.
GRM at USD6.4/bbl, up from USD5/bbl in 1QFY17
- The regional benchmark Reuters Singapore GRM was up 28% YoY and flat QoQ, led by improvement in fuel oil cracks.
- PE, PP and PVC delta improved sequentially. While POY spread increased, PSF spread declined sequentially during the quarter. RIL is expected to benefit from QoQ/YoY strengthening in deltas and increase in petchem volumes.
Daily pricing of auto fuels
- On June 16, 2017, GOI rolled out daily pricing of auto fuels across the country. In our view, daily pricing would allow OMCs to pass on product price and exchange rate fluctuations without any lag. This would make OMCs’ earnings less volatile.
- OMCs’ gross margins for auto fuels have declined YoY/QoQ during the quarter. Gross margins were INR2.28/liter in 1QFY18 v/s INR2.32/liter in 1QFY17 for petrol and INR1.89/liter in 1QFY18 v/s INR2.40/liter in 1QFY17 for diesel.
Domestic oil production revived
- After almost a decade of negative-to-flat growth, domestic gas production has increased by ~5% YoY in April-May 2017 v/s 3% YoY decline in FY17. We expect domestic gas production to grow at 10-15% annually for the next five years.
- Domestic crude oil production increased by 0.07% YoY in April-May 2017. Production for ONGC grew by 2.51% YoY to 3.78mmt during April-May 2017; OIL’s production grew by 5.32% YoY to 0.53mmt during April-May 2017.
- We expect oil production for ONGC to further increase from the nominated fields like WO16, Vasai East, and Ratna & R-series.
LNG imports to continue growing
- While LNG imports grew by 16% YoY in FY17, they declined by 4% during April-May 2017 due to lower volumes at Dabhol LNG terminal. We expect LNG imports to revive and grow in double-digits for the rest of the year.
Valuation and view
- The recent fall in crude oil price would result in inventory losses (~USD1-2/bbl) for OMCs (IOCL/HPCL/BPCL). We expect OMCs’ core earnings to decline YoY/QoQ in 1QFY18.
- RIL is expected to report a decline in its GRM in the quarter, led by narrowing light-heavy differential and inventory loss of ~USD1/bbl. While we expect subdued profitability in the refining segment, petchem profitability is likely to increase YoY/QoQ, led by improved deltas and increase in petchem volumes.
- We expect volume growth to continue for CGD players. We might see margin compression (YoY) in the industrial segment due to increase in LNG prices.
- Decline in crude oil price is negative for ONGC/OINL; however, OPEC and non-OPEC efforts to cut oil production should revive realizations, benefitting ONGC/OINL.
- Remain cautious on OMCs: We have downgraded OMCs (except HPCL) on account of loss in market share at the end of FY17. Private players’ market share in diesel segment stood ~8% at the end of FY17 v/s less than ~5% earlier. We believe OMCs would continue to lose market share. Hence, we remain cautious, though the recent correction in stock prices does make them look attractive.
- ONGC looks attractive: We prefer ONGC, as (a) cost efficiency would result in decline in opex, (b) gas production is likely to grow 10-15% annually for the next five years, (c) oil production is set to increase, (d) it has no subsidy burden, and (e) recent correction in stock price provides an opportunity to buy.
- PLNG – a long term buy: Visibility on PLNG’s medium/long-term earnings is high, given (a) the huge gas demand-supply gap in India, (b) volume growth, driven by gradual capacity addition, and (c) earnings growth boosted by annual re-gas charge escalation to protect IRR. Poor competition from existing and upcoming terminals and lower LNG prices adds to the Buy case for PLNG.
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Motilal Oswal was founded in 1987 as a small sub-broking unit, with just two people running the show. Today it has a 2000 member team with a networth of Rs7 bn and market capitalization as of March 31, 2008 at Rs19 bn.
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