| Summary of Contents
| SHAREKHAN SPECIAL Q4FY2012 Oil & Gas earnings review Key points -
Higher crude prices improved realisation; GRM improved sequentially: As the average Brent crude oil price increased by around 13.3% year on year (YoY) in Q4FY2012 to around $119 per barrel, the gross realisation of the end-products of exploration and production also rose. However, due to an increase in the subsidy burden in FY2012 the net realisation for the public sector upstream companies like Oil and Natural Gas Corporation (ONGC) and Oil India could grow marginally on a year-on-year (Y-o-Y) basis (as against a double-digit growth in the gross realisation). On the refining front, the gross refining margin (GRM) of the refining companies improved on a sequential basis on account of the strong distillate cracks and improved gasoline cracks. However, the Arab light-heavy differential during the quarter contracted by $0.7 per barrel which partially offset the benefit of the improvement in the gasoline cracks. However, on a Y-o-Y basis the GRM for Q4FY2012 remained lower. In our coverage, RIL's GRM for Q4FY2012 stood at $7.6 per barrel (as compared with $6.8 per barrel in Q3FY2012). -
Surge in under-recoveries; subsidy burden puts pressure on net realisation: An increase in the price of crude oil, depreciation in the rupee against the dollar and the government's inability to hike the prices of petroleum products inflated the under-recoveries to as high as around Rs140,000 crore in FY2012 as compared with Rs78,096 crore for FY2011. Among our coverage stocks, Oil India has allocated subsidy of Rs2,874 crore (higher by 79% YoY) for Q4FY2012 and Rs7,352 crore for FY2012 as against Rs3,293 crore in FY2011. Hence, the increase in the subsidy limited the net realisation growth. Further, GAIL has allocated subsidy of Rs1,390 crore (up 55% YoY) for the quarter. GAIL also witnessed pressure on the margins of its gas and liquefied petroleum gas (LPG) transmission segment whereas the petrochemical business of the company displayed an improvement in its profitability. -
RIL's huge other income partially offset the impact of margin pressure: Reliance Industries Ltd (RIL) reported an operating profit margin (OPM) of just 7.7%, 584 basis points lower compared with the Q4FY2011 OPM. The profit before interest and tax (PBIT) margin of the refining segment contracted to 2.2% in Q4FY2012 as compared with 4% in Q4FY2011, primarily on account of a 17.4% Y-o-Y drop in the GRM to $7.6 per barrel. Moreover, the PBIT margin of the petrochemical division also contracted by 428 basis points YoY to 10.2%. The operating profit of RIL in Q4FY2012 decreased by 33.3% YoY to Rs6,563 crore. However, with the strong other income of Rs2,295 crore as compared with Rs917 crore in the corresponding quarter of the previous year, the decline in the net profit was limited to 21.2% as compared with the 33.3% decline at the operating level. The higher other income could be attributed to a significantly higher cash balance during the quarter. -
Oil India's performance in line with estimate: In Q4FY2012 Oil India posted a net profit of Rs444.8 crore, which was in line with our estimate (implied Q4FY2012). The reported net profit declined by 20.9% YoY on account of a surge in the subsidy burden to Rs2,873 crore vs Rs1,605 crore in Q4 of FY2011. With the increase in the price of crude oil during Q4FY2012, the gross realisation of the company increased by 15.1% YoY to $119.7 per barrel. However, with the increase in the subsidy burden the net realisation for FY2012 improved by just 2.2% to $59.8 per barrel. On the production front, the company reported a 1.5% Y-o-Y growth in its crude oil production and a 6.5% Y-o-Y growth in its natural gas production. We believe the production of crude oil and natural gas would grow at compounded annual growth rates of 4% and 7.5% respectively over FY2012-14. -
GAIL's performance dented by higher subsidy burden: GAIL reported net sales of Rs10,488 crore, a 17.9% Y-o-Y growth that was largely in line with our estimate. However, the OPM contracted sharply by 699 basis points YoY due to an increase in the subsidy burden to Rs1,390 crore (higher by 55% YoY). A lower margin in the gas and LNG transmission segment also affected the OPM. On the volume front, the management targets 120-121mmscmd of gas transmission in FY2013 which excludes the LNG volume from the Dabhol terminal (likely to be commissioned in Q3FY2013). The import of LNG from the Tapi pipeline would start from 2016-17. -
Outlook and valuation: We expect the under-recoveries to reduce in FY2013 on the back of the softening of crude oil prices, given the weak global economic outlook and the ramp-up in the output suggested by the authorities in Saudi Arabia. Moreover, we hope the government would finally take some corrective steps as the situation is getting precarious and it is pushed against the wall. In such a scenario, we expect the subsidy burden of the upstream oil companies to reduce going ahead. From a longer-term perspective, we like Oil India due to its recent initiatives to monetise its hydrocarbon assets, its strong balance sheet and attractive dividend yield. We maintain our Buy recommendation on the stock with a price target of Rs600.
On the other hand, GAIL could continue to underperform in the near term due to an overhang of regulatory issues and expectations of a weaker financial performance in the near term. However, a bulk of the concerns are already priced in and we maintain our Buy recommendation on GAIL with a price target of Rs410 based on the sum-of-the-parts valuation method.
In case of RIL, we have downgraded our earnings estimates to factor the Q4FY2012 performance of the company but retained our Buy rating with a price target of Rs890. We remain positive on the stock from a long-term perspective. There are no near-term triggers in the stock. However, the petrochemical business is already looking up and the refining margins should also improve in future. The company would gain from the expansion in both these businesses. The upstream business continues to be unpredictable. But at the current market price the implied valuation of the upstream business is already abysmally low and leaves scope for a positive surprise. | | Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a postition in the companies mentioned in the article. | | | | | |
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