Oil & Gas - Robust retail margin boost earnings by Elara Capital
Robust retail margin boost earnings
We have a positive view on the Oil & Gas sector, based on rising domestic gas and imported LNG supply, benevolent crude oil prices and aggressive exploration & production activity. Our top pick in the space is Oil India (OINL IN), which would benefit from connection of its gas production infrastructure with GAIL’s (GAIL IN) pan-India gas grid after completion of the Guwahati-Baruani gas pipeline in H1FY25 and the upcoming Indradhanush Gas Grid in North-East that would connect OINL’s major fields by H2CY25. This would unlock growth potential for OINL’s gas production (undeveloped 2P gas reserves at 80% of overall reserves).
Q3FY25E EBITDA to grow 7% YoY led by higher diesel and gasoline margin: We expect EBITDA for Elara Oil & Gas universe – 14 companies – to grow 7%/31% YoY/QoQ in Q3FY25E, led by strong retail diesel and gasoline margin for oil marketing companies (OMCs), though partly offset by LPG losses for OMCs and weaker GRM YoY. City gas distribution (CGD) companies may see a mixed trend – Companies with higher CNG contribution may see a sharp YoY fall in EBITDA/scm margin due to lower domestic gas allocation. Reliance Industries’ (RIL IN) Q3FY25E GRM may be at USD 10.4/bbl versus USD 13.4/bbl in Q3FY24.
Strong retail margin to drive OMCs’ profitability: Retail diesel margin may increase to INR 9.3/liter versus INR 0.4/liter YoY and INR 5.8/liter QoQ. Retail gasoline margin may jump to INR 12.8/liter versus INR 7.8/liter YoY and INR 9.4/liter QoQ, led by a decline in crude oil prices. We expect GRM for PSU refiners – Bharat Petroleum (BPCL IN), Chennai Petroleum (MRL IN), Hindustan Petroleum (HPCL IN), Indian Oil (IOCL IN) and MRPL (MRPL IN) – to average at USD 5.1/bbl in Q3FY25E from USD 1.6/bbl in Q2FY25 and USD 9.3/bbl in Q3FY24. We expect average crude inventory gain in Q3FY25E to be USD 0.3/bbl versus USD 2.7/bbl loss in Q2FY25.
Upstream PSUs crude oil realization stable YoY: We expect ONGC’s (ONGC IN) EBITDA to grow 7% YoY in Q3FY25E amid lower statutory levies. Crude oil realization of upstream PSUs (net of windfall taxes) is estimated at USD 72.6/bbl, up 1% YoY but down 2% QoQ. OINL’s crude oil production is likely to grow 1% YoY, while gas production is set to be flat YoY due to a delay of a few quarters in Indradhanush Gas Grid gas pipeline connection and constraint in demand from the North-East (until the expansion of Numaligarh refinery by Q3FY26).
CGDs – Total gas sales volume to rise within 5-10% YoY: We expect EBITDA to grow a sharp 20% YoY for Gujarat Gas (GUJGA IN) due to base effect (weak EBITDA/scm margin in Q3FY24), with volume growth at 5% and EBITDA/scm margin at INR 5.4/scm (up 13% YoY). EBITDA for Indraprastha Gas (IGL IN) and Mahanagar Gas (MAHGL IN) is set to decline 14% YoY and 18% YoY, respectively, led by a 21-26% decline in EBITDA/scm margin, though partly offset by a 9-10% volume growth.
GAIL’s EBITDA to fall 6% YoY and RIL’s to grow 2% YoY: GAIL’s EBITDA may fall 6% YoY in Q3E, due to normalization of gas marketing margin, though partly offset by rising transmission earnings and improved realization in LPG & Liquid Hydrocarbon segments.
Gujarat State Petronet’s (GUJS IN) EBITDA may dip 57% YoY on likely 12% YoY drop in transmission volume and tariff cut in Q1FY25. We expect Petronet LNG (PLNG IN) to post an EBITDA drop of 33% YoY as the base quarter had exceptional gains from take-or-pay provision. LNG import volume is likely to fall 3%. RIL may see flat consolidated EBITDA YoY (up 2% YoY), due to a 24% drop in standalone EBITDA (refining, petchem and E&P), but offset by an EBITDA growth of 17% in retail and 16% in digital services (telecom).
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