IGI Logo

Robust quarter for oil companies; challenging one for gas companies

We expect RIL’s 3QFY22 EBITDA to grow 7% QoQ due to improvement in refining and petchem margin, higher ARPU & subscriber addition and strong growth in Retail business. OMCs’ core earnings are likely to improve QoQ on the back of a) improvement in GRM; and b) continued strong marketing margin. However, their reported earnings are likely to see limited QoQ growth due to absence of inventory gains. Upstream PSUs are likely to report strong earnings due to higher crude and gas realisation. For CGD companies, it will be a challenging quarter due to likely hit to margins given the spike in spot LNG prices. Further, high spot LNG price is likely to impact volumes for PLNG, GAIL and GSPL; however, GAIL could see gains in gas trading and LPG business.

We maintain BUY on oil PSUs on valuation grounds amidst gradual improvement in fundamentals. Further, we prefer gas companies due to their structural volume growth story and strong pricing power — IGL and Gujarat Gas (GGas) being our preferred play.

* RIL EBITDA likely to rise 7% QoQ: RIL’s 2QFY22 EBITDA is likely to be up 7% QoQ at INR 279bn based on following assumptions: a) O2C EBITDA likely to rise 7% QoQ to INR 136bn due to improvement in refining margin (to USD 8.5/bbl) and petchem margins; b) Digital EBITDA likely to rise 4% QoQ to INR 99bn with net subscriber addition likely at 8mn QoQ, APRU expected to increase to only INR 148 (from INR 144 in 2QFY22); and c) Retail EBITDA likely to grow by strong 22% QoQ at INR 36bn due to easing of lockdown restrictions and robust demand during festive season.

* OMCs’ core earnings likely to improve QoQ given improvement in GRM and continued strong marketing margin: OMCs’ core earnings are likely to improve significantly due to rise in Singapore Dubai GRM to USD 6.1/bbl (vs. USD 3.8/bbl in 2QFY22) led by improvement in petrol and diesel cracks — Exhibit 2. Further, strong marketing margin trend is likely to sustain given continued strength in auto-fuel marketing margin (Exhibit 6). However, reported EBITDA is likely to see limited QoQ growth due to absence of inventory gains (OMCs may report marginal inventory losses).

* Expect a strong quarter for Upstream PSUs due to higher crude and gas realisation: Upstream PSUs’ (ONGC and Oil India) PAT are expected to rise strong QoQ growth on the back of: a) higher crude prices (Brent averaging at USD 79/bbl in 3QFY22 vs. USD 73/bbl in 2QFY22) — Exhibit 3: b) increase in domestic gas price to USD 2.9/mmbtu in 2HFY22 vs. USD 1.8/mmbtu in 1HFY22 — Exhibit 10. Further, as per the gas price formula, domestic gas price is likely to jump to ~USD 6.8/mmbtu in 1HFY23 and to ~USD 9.0/mmbtu in 2HFY23 (assuming current global gas prices continues till Jun'22) driving upstream PSUs earnings, going forward. Crude and gas sales volumes are likely to continue to witness muted growth.

* Challenging quarter for CGD companies’ due to likely hit to margins given the spike in spot LNG prices: For Gujarat Gas (GGas), we expect its PAT to decline 65% QoQ due to likely contraction in its margin (EBITDA/scm) to INR 2.0/scm (vs. INR 4.0/scm in 2QFY22) given spike in spot LNG prices (to USD 36/mmbtu in 3QFY22 vs. USD 18/mmbtu in 2QFY22 — Exhibit 9) and GGas’ high dependence on spot LNG. Further, we expect GGas’ volume to decline 3.3% QoQ to 11.0 mmscmd due to sharp price hikes taken in industrial segment. We expect IGL’s PAT to decline 30% QoQ due to likely decline in its margin to INR 6.1/scm (from INR 8.0/scm in 2QFY22) given spike in spot LNG prices and rise in proportion of spot LNG usage. However, IGL’s volume growth trend is likely to continue as we expect its overall volume to rise 3.4% QoQ to 7.5mmscmd (led by 4% QoQ jump in CNG volume). Similarly, for MGL we expect PAT to decline by 32% QoQ due to decline in margin to INR 7.2/scm (from INR 10.5/scm in 2QFY22; overall volume to rise by 5.3% QoQ to 3.3mmscmd (led by 6% QoQ rise in CNG volume).

* Spike in spot LNG price to impact PLNG, GAIL and GSPL gas volume; GAIL could see gains in gas trading and LPG business: High spot LNG price is likely to result in 6% QoQ decline in PLNG’s regas volume. Hence, its PAT could decline 12% QoQ. GSPL could also see volume declining 8% QoQ (at 34.5mmscmd) while tariff is expected to be steady. GAIL is also likely to see 3-4% QoQ decline in gas transmission volume (at 110mmscmd) and gas trading volume (at 95mmscmd) due to lower off-take given spike in spot LNG prices. Further, high spot LNG prices could impact its petchem margins while petchem volume is expected to be steady at 220kt. However, this is likely to be more than offset by: a) further strength in gas trading margin to INR 1,400/tcm (vs. INR 1,250/tcm in 2QFY22); and b) improvement in LPG segment margins (given rise in global LPG prices) and recovery in volumes to 280kt. Hence, we expect GAIL’s 3QFY22 EBITDA to rise 7% QoQ at INR 37bn.

* Change in estimates: We have raised FY22 EBITDA for ONGC and Oil India by 5-6% factoring actual Brent crude price till date; while FY23-24 estimate and TP remains unchanged (ONGC TP of INR 230/share and Oil India TP of INR 300/share) as we maintain our long-term Brent crude price assumption of USD 65/bbl. We tweak RIL FY22-23 PAT estimates by 2-4% factoring recent tariff hikes, offset by moderation in our assumption of subscriber additions – TP remains unchanged at INR 2,800/share.

* Maintain BUY on oil PSUs on valuation grounds; IGL and GGas continue to be our structural BUY ideas: We maintain BUY on oil PSUs (ONGC, BPCL and GAIL preferred) on valuation grounds amidst gradual improvement in fundamentals (refer our note India PSUs: Building blocks for value creation being put in place?). Further, we continue to prefer gas companies due to their structural volume growth story and strong pricing power — IGL and GGas being our preferred picks. We believe any weakness in CGD companies share price (due to near term risk to margin on account of high spot LNG prices and likely surge in domestic gas price) should be used as a buying opportunity.

To Read Complete Report & Disclaimer Click Here

Please refer disclaimer at https://www.jmfl.com/disclaimer

CIN Number : L67120MH1986PLC038784

Above views are of the author and not of the website kindly read disclaimer