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Global crude oil prices have declined significantly to ~US$30/bbl in the current quarter (Q4FY20-TD) from a closing price of US$66.4/bbl in Q3FY20. A sharp reduction in oil demand owing to Covid-19 outbreak coupled with a disagreement between Opec and Russia regarding a reduction in oil output has resulted in a sharp drop in crude oil prices.
Realisation of upstream companies to be impacted
Crude prices witnessed a sharp decline in March due to spread of Covid-19 across the globe and Opec deal failure. A likely increase in oil output by both Saudi Arabia and Russia from Q1FY21E and lower demand are expected to lead to a sizeable oversupply in the oil market. Subsequent low oil prices are expected to significantly affect ONGC’s profitability.
Higher marketing margins to provide some relief
Oil marketing companies (OMCs) are expected to face huge inventory losses during the quarter and report losses. However, higher marketing margins are expected to provide respite to OMCs as the cost benefit has not been fully passed on to consumers. In the first fortnight of March 2020, product sales of OMCs have reduced by 10% YoY owing to lowered demand amid the Covid-19 spread. On refining profitability front, weak gasoline, gasoil and jet fuel spreads will keep refining margins subdued in the near term.
CGD sales volume to be impacted in near term
City gas distribution (CGD) companies’ sales earnings are set to be impacted in the near term. The central government has put restrictions on travel, which has resulted in lower demand. The reduced demand will affect CNG sales volume of CGDs. On the PNG front, industrial and commercial sales were impacted due to closure of industries. This is expected to lead to 25- 30% decline in volumes in Q1FY21 assuming lockdown during April.
Valuation & Outlook
Although it is difficult to assess the exact impact of the ongoing situation, lower demand of all kinds of fuels amid Coronavirus outbreak are expected to impact Q4FY20E, FY21E earnings of all our coverage companies. 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 vs. competing fuels.
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