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Oil rebound & gas strength improves ONGC & GAIL’s outlook

Brent is up 8% to over US$74/bbl from the lows of last week caused by OPEC+ decision to hike output. FY22E-FY23E Brent based on latest futures are 6-5% higher than our estimates. With spot LNG, Henry Hub (HH) and UK NBP based on futures at new highs, we estimate FY23E deepwater and APM gas price being 15- 34% higher than our estimate of US$8.4-4.25/mmtbu at US$9.6-5.7/mmbtu. LPG price based on futures is also higher than our estimates for GAIL and ONGC. Higher oil, LPG & gas price than our estimates would mean upside to FY22EFY23E EPS of ONGC of 14-20% and OIL of 16-13%. GAIL’s gas marketing EBITDA at latest oil and HH futures is 21% higher vs base case in FY22E, but 2% lower in FY23E though, in the most likely scenario is 70-8% higher (2-15% upside to EPS).

On latest futures FY22-23E Brent 6-5% & FY23E deepwater & APM gas 15-34% higher than our estimates:

Brent rebound from last week’s lows means FY22EFY23E Brent based on futures as of 29-Jul’21 at US$71.8-68/bbl is 6%-5% higher than our estimate of US$67.5-65/bbl. Strength in US and UK gas and Asian spot LNG prices continues given strong demand, supply issues and European inventories at least at 11-year low. At HH and NBP futures as of 29-Jul’21 of US$3.6- 11.4/mmbtu, FY23E APM gas price at US$5.7/mmbtu would be 34% higher than our estimate of US$4.25/mmbtu. Deepwater gas price at spot LNG futures as of 29- Jul’21 at US$9.6/mmbtu is 15% higher than our estimate of US$8.4/mmbtu.

13-20% upside to ONGC & OIL’s FY22-23E EPS at latest LPG, oil & gas futures:

At FY22E Brent based on futures as of 29-Jul’21 of US$71.8/bbl, upside to FY22E EPS of ONGC is 14% (also higher LPG) and to that of OIL is 16% after factoring-in NRL’s FY22E GRM at US$37/bbl (US$32/bbl in base case assuming cut in excise duty on auto fuels; appear unlikely now). FY23E Brent based on futures being 5% higher than our estimate and 15-34% higher deepwater and APM gas price based on futures would mean 20% upside to FY23E EPS of ONGC and 13% to that of OIL.

70-8% upside to GAIL’s gas marketing EBITDA in most likely scenario:

HH prices and futures continue to rise while oil is lower than 5-Jul’21 highs. GAIL’s FY22EFY23E gas marketing EBITDA, therefore, at Brent and HH futures as of 29-Jul’21 at Rs33.5-38.4bn is lower than it was at futures in the last few months, but 15-24% higher than at futures as of 20-Jul’21 (see). We estimate FY22E gas marketing EBITDA in most likely scenario at Rs46.8bn, which implies 70% upside to base case; our estimate, based on company commentary on last earnings call, assumes 20% LNG volumes sold at spot prices and 50-30% when Brent futures were at US$59- 65.7/bbl, respectively. FY23E gas marketing EBITDA in most likely scenario is estimated at Rs42.5bn, which implies 8% upside to base case; our estimate assumes 20% LNG volumes sold at spot prices and 50-15-15% when Brent futures were at US$63-68.8/bbl, respectively. FY22E-FY23E trading profit on selling US LNG at spot prices is estimated at US$5.9-2.0/mmbtu vs US$1.1-1.3/mmbtu at oil-linked prices.

22-2% upside to GAIL’s FY22E-FY23E EPS:

In most likely gas marketing EBITDA scenario, we see 15-2% upside to GAIL’s FY22E-FY23E EPS. Higher LPG price based on futures would imply 31% upside to GAIL’s FY22E LPG EBITDA and 7% upside to EPS. Thus, upside to GAIL’s FY22E-FY23E EPS may be 22-2%.

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