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Oil prices, marketing segment to drive profits…

Upstream oil & gas companies to gain…

Global crude oil prices are currently trading near three-year highs. Brent crude oil prices on a closing basis increased US$3.7/bbl QoQ to US$78.8/bbl in Q2FY22E. Oil prices corrected at the start of August due to possible drop in global demand and Opec+ decision to reduce production cuts. Augustend onwards oil prices soared due to lower production post Hurricane Ida and lower-than-expected increase in production in August. Subsequently, average crude oil prices increased by US$4.4/bbl to US$73/bbl. Hence, net realisations of upstream companies will improve QoQ as well as YoY.

GRMs pick up; marketing margins to support profits

Benchmark Singapore GRMs were at US$3.8/bbl in Q2FY22 vs. US$2.1/bbl in Q1FY22 mainly due to recovery in fuel oil cracks. Hence, they are less relevant now for Indian refiners as low grade fuel oil is a significant component of benchmark. For Indian refiners, cracks of gas oil, gasoline, jet fuel are more important. Cracks for gas oil remained flattish at US$5.4/bbl while gasoline product cracks saw an increase of US$1.9/bbl to US$11.7/bbl. Jet fuel cracks saw a recovery of US$0.9/bbl to US$5.4/bbl. Overall, core GRMs for refiners during Q2FY22 continue to remain below long-term averages. While we expect inventory gains during the quarter, benefit of inventory gains will be lower QoQ as per our internal estimates. On the marketing front, fuel demand is expected to witness an increase YoY as well as QoQ, as demand was impacted due to travel restrictions in Q2FY21 and Q1FY22. Marketing volumes are expected to grow in the range of 7-10% YoY. In terms of marketing margins, we expect an improvement in core profitability QoQ. Overall profitability for OMCs is expected to decline YoY as all companies benefitted from inventory gains in Q2FY21.

CGD volumes to grow; margins to moderate from high level

Sales volume of city gas distribution (CGD) companies are expected to increase in the range of 14-40% YoY. We expect strong sales volume growth for companies with high CNG contribution in sales mix. During Q2FY22, sharp increase in spot LNG prices was witnessed. In spite of price hikes taken during the quarter, gross margins are expected to be decline QoQ. For companies with high PNG contribution in sales mix, margin decline is expected to be sharper. For large gas utility companies, volumes will be driven by increased domestic production from new Reliance gas fields. However, LNG import volume is estimated to fall YoY.

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