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Published on 30/11/2019 9:05:33 AM | Source: Kotak Mutual Fund

Oil & Gas Sector Update By Kotak Mutual Fund

Posted in Broking Firm Views - Sector Report| #Oil and Gas Sector #Sector Report #Kotak Mutual Fund

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Oil Price Volatility Clouding The Outlook

Oil price cool off but volatile within a range

* Oil price cooled off from above US$ 70/bbl as demand is weak but geopolitical newsflow are keeping prices volatile. There has been relief for OMCs with oil price currently in sweet spot at around US$ 60/bbl but above US$70-75/bbl risks would be perceived to be higher for OMCs.

* With General Elections done and lower oil price, OMCs improved their marketing margin and increase in excise duty on petrol and diesel announced in Union Budget in July’19 was also passed on. Upstream cos.’ earnings vs last year will be at risk with oil below US$ 65/bbl.

 

Talks of privatization creates interest in OMC stocks

* Govt. has initiated process to divest its stake in BPCL which has opened up possibility of privatization. While finalizing the stake sale may be few months away, it will unlock significant value in OMCs and brought in interest from the investors.

 

INR stability gives partial relief

* Depreciation in INR against USD hits OMCs through forex loss as crude oil purchases are in USD and there was need to raise retail price to offset the impact. However, stability in INR against USD over last 1 year has provided relief for OMCs and enabling them to reduce prices.

 

Refining margins recover from lows

* Demand got impacted in H1CY19 due to lag effect of higher oil price and slowing economic growth. However, refining margins rebound since Jul’19 on back of recovery in crack spreads on gasoline and naphtha. Margins can further gain strength in early 2020 with new IMO regulations.

 

Gas prices cheaper options vs petroleum fuels

* Domestic gas price cut by 12% for H2FY20 is will support demand. Lower cost price benefit has been passed on by CGD companies while upstream cos. will be impacted by lower realization. Natural gas, when brought under GST in future, will be significant positive for demand.

 

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