Motilal Oswal has come with its December quarterly earning estimates for Oil and Gas sector. According to the research firm, for Q3FY12, under-recoveries are expected to increase 56% QoQ to INR336b, led by high oil prices, increased international diesel prices and rupee depreciation.
Oil prices resilient, but Singapore GRM down 15% QoQ to USD7.8/bbl:
Amidst continued European/MENA/Iran crisis, Brent crude averaged USD110/bbl (USD102- 116/bbl range) in 3QFY12 v/s USD113/bbl in 2QFY12. The regional benchmark Reuters Singapore GRM averaged USD7.8/bbl v/s USD9.1/bbl in 2QFY12. The decline was led by sharp fall in gasoline and naphtha cracks. However, we expect GRMs to remain in the range of USD7-9/bbl in the medium term, as shutdown of ~2.5mbpd capacity would help absorb new capacity coming up in 2012-13.
Petchem spreads (except PVC) sustain, but volume sustenance at risk post 21% QoQ jump in 2QFY12:
In polymers, PE and PP spreads over naphtha were up 2-9% QoQ but PVC spread was down 39% QoQ (at decade-low levels). Integrated polyester spreads were up 2-5% QoQ. Post the double-digit QoQ volume growth in 2QFY12, sustenance is at risk (amidst continued supplies from the Middle East); we suspect that producers might have given discounts over the list price to sell.
Ad-hoc under-recovery sharing to continue in 3Q; full-year under-recoveries to cross INR1.3t:
We expect under-recoveries to increase 56% QoQ to INR336b, led by high oil prices, increased international diesel prices and rupee depreciation. Under-recovery sharing would again be ad-hoc, and like the previous years, would be finalized in the last quarter. We model upstream sharing at 40%/38.8% and downstream sharing at 2%/ 10% for FY12/FY13, with the balance being the government's share. However, given that the government is already reeling under high fiscal burden, we believe there remains upside risk to our FY12 upstream sharing estimate.
Valuation and view:
With deterioration in the government's fiscal health, ONGC's earnings seem more vulnerable, as upstream share in overall under-recoveries is likely to be higher than our assumption of 40% in FY12. OMC stocks will be under pressure due to uncertain subsidy-sharing, poor GRM and increased borrowing costs, led by delay in compensation from the government. We maintain Neutral on GAIL and GSPL, asoperational earnings are unlikely to surprise positively, led by headwinds for incremental gas availability in India. Strong earnings sustainability augurs well for Petronet LNG. Though RIL has benefited from the rupee depreciation, we maintain Neutral to reflect reduced KG-D6 production, uncertain GRM environment, non-clarity on cash utilization, RoE reaching sub-15% and increased share (80%) of cyclical refining and petchem businesses in earnings. Cairn India, being an upstream pure play, is the largest earnings beneficiary of higher oil prices and rupee depreciation. With the closure of Cairn-Vedanta deal, we expect ramp-up in production and decision on investing in new areas, with huge free cash flows. Also, we await likely reserve upgrade and dividend policy.
Our key assumptions:
Our crude price assumption for FY12/13/14/long term is USD111.3/100/95/90/bbl.
We expect the regional benchmark, Singapore Reuters GRM to remain in the range of USD7-9/bbl in the near term.
We model Singapore GRM at USD8.4/bbl in FY12 and USD8.2/ bbl in FY13.
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