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Last Updated : Apr 02, 2020 11:08 AM IST | Source: Moneycontrol.com

COVID-19 impact: Fall in demand to weigh on oil & gas sector; earnings outlook gloomy

Even though it is difficult to assess the exact impact of the disruption, the upstream oil companies may experience more heat as the demand for oil is set to fall.

 
 
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The outbreak of COVID-19 and the disruption caused by it is likely to impact Q4FY20 and FY21E earnings of oil & gas sector players, experts and brokerages said.

Even though it is difficult to assess the exact impact of the disruption, the upstream oil companies may experience more heat as the demand for oil is set to fall.

As per Edelweiss Securities, oil experts FGE believe the 21-day nationwide lockdown in India is hugely impacting oil demand and FGE expects 50 percent (about 2mmbpd) pullback in the product’s demand in April 2020.

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About 85 percent of India’s diesel demand comes from the road sector. The ban on public transport will directly impact diesel demand by an estimated 620kbpd YoY in March and 1.2mmb per day in April, said Edelweiss.

Edelweiss expects oil demand to improve only by the end of the current year.

The road ahead

Brokerages point out that oil marketing companies (OMCs) have sharply increased retail fuel margins, partially offsetting lower volumes and weak gross refining margins (GRMs).

"We recently cut refinery throughput of OMCs 11-21 percent. We now expect 26 percent/20 percent/75 percent earnings growth in FY21E at Indian Oil/BPCL/HPCL, respectively, primarily due to a low base in FY20 owing to refinery shutdowns," said Edelweiss.

Brokerage firm Centrum Broking is of the view that very weak Singapore GRMS, the complete collapse of fuel demand due to the shutdown and even refining thruput shutdown coupled with the inventory loss owing to a $12/bbl decline in average crude prices, and much sharper $30/bbl dip over the 2nd-3rd week of March, will combine to deliver very weak Q4FY20-Q1FY21E.

"For the quarter, we estimate a steep EBITDA and PAT decline of 66 percent and 86 percent, respectively, for OMCs such as Indian Oil Corporation, BPCL and HPCL.

In Centrum's views, city gas distribution firms such as Indraprastha Gas, Mahanagar Gas and Gujarat Gas are expected to deliver a relatively stronger quarter YoY with stronger margins more than offsetting lower volume growth.

"EBITDA and PAT is estimated to grow more than 38 percent and 50 percent, respectively, driven by soft spot LNG prices and a reduction in PMT gas prices offset by weaker volume growth for Indraprastha Gas and Mahanagar Gas," said Centrum

On the other hand, lower Brent Crude prices, coupled with weak production and lower realisations drive a weak Q4 for ONGC and Oil India. EBITDA and PAT for the two companies are estimated to decline 32 percent and 68 percent YoY, respectively, Centrum said.

ICICI Direct is of the view that OMCs are expected to face huge inventory losses during the quarter and report losses. However, higher marketing margins are expected to provide respite to them as the cost-benefit has not been fully passed on to consumers.

On refining profitability front, weak gasoline, gas-oil and jet fuel spreads will keep refining margins subdued in the near-term, ICICI Direct said.

Stocks to watch out for

Indian refineries are competitive and, in fact, have enhanced high margin distillate yields, especially at a time when high cost Japanese and EU refineries are poised to shut down permanently, said Edelweiss Securities.

Edelweiss has 'buy' recommendations on Indian Oil Corporation, BPCL and HPCL.

Antique Stock Broking has retained 'buy' recommendations on Gujarat Gas, Indraprastha Gas and Mahanagar Gas but has cut their target prices on account of inexpensive valuations.

"Our target prices for Gujarat Gas, Indraprastha Gas and Mahanagar Gas stand revised to Rs 300 (from Rs 360), Rs 435 (from Rs 535) and Rs 965 (from Rs 1,265), respectively. Among the three, our preference is for Gujarat Gas, on account of a relatively resilient industrial portfolio, with meaningful growth potential," said Antique.

ICICI Direct believes a decline in stock prices presents investors with a buying opportunity.

"We prefer CGD companies and selective OMCs in our coverage. CGD companies are a structural play on increasing gas demand, favourable government policies and competitive price advantage against competing fuels.

ICICI Direct has 'buy' recommendation on Adani Gas, BPCL, Gujarat Gas, Gujarat State Petronet, HPCL, Petronet LNG, Indraprastha Gas and Mahanagar Gas.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

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First Published on Apr 2, 2020 11:08 am
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