March Quarter Preview: Oil & Gas Sector

The March 2012 quarter for the Indian Oil & Gas Sector is expected to be much alike the December 2011 quarter. While the upstream majors like ONGC and Oil India would see their performance impacted by their increased share in the subsidy bill, the oil marketers like IOC, BPCL and HPCL may get compensated by the govt. for all losses reported on sale of subsidized fuel like diesel, LPG and kerosene. The private sector players would continue to face pressure on the refining margins front while natural gas operators like GAIL would see a muted growth as a result of lower domestic gas output. However, before we continue talking further on the domestic scenario and expectations from the March quarter, lets quickly glance through the global environment.

During the March quarter dated Brent crude oil prices rose by 10 per cent to USD 122 per barrel majorly fueled by the rising tensions in the Middle East and African Regions (MENA) owing to the conflicts between the western powers and Iraq over the latter’s alleged nuclear war-house aspirations. This coupled with the Indian Rupee (INR) staying put above the Rs 50 per dollar levels has thrown India’s current account situation askew. What’s astonishing is that despite Brent at current levels being lower than its 2008 levels of USD 148 per barrel, in rupee terms the Indian crude basket is at its all time which is very alarming.

While the upstream majors like ONGC and Oil India would highly benefit from the rising global crude oil prices as this will enable them to improve their gross realizations, the adhoc subsidy sharing mechanism which would require them to foot 40 per cent of the fuel subsidy bill to compensate the oil marketers for their losses would severely impact them on the net realization level. Also the budget announcement to increase the amount of cess levied on indigenous petroleum crude oil from Rs 2,500 per MT to Rs 4,500 per MT would partially impact their earnings, however the full impact would be seen from the June quarter of 2012 onwards.

The oil marketing companies (OMC) like IOC, BPCL and HPCL continue to report losses on the sale of subsidized fuel like diesel, LPG and kerosene and its estimated that they would run-up a bill amounting to Rs 45000 crore for the March quarter, which would take the total under-recovery bill for FY12 over Rs 145000 crore. While the govt. as always is expected to make good the losses arising from the share of subsidized fuels, one must note that the OMC’s have been forced to sell de-regulated petrol at below par prices which is not subsidized by the govt. With a loss of minimum Rs 3 per litre of petrol sold, the OMC’s would have to absorb them on their books which will severely dent their financial performances.

Reliance Industries (RIL) is likely to report another dismal quarterly performance as India’s largest company by market capitalization continues to thither under the weight of falling margins in its flagship refining segment, dwindling gas output and a weak outlook for the petrochemicals business. The buyback announced at the time of announcing the December quarter results also seem to have flopped as the shares are currently trading at a considerable discount to the buyback price.

With another quarter of falling domestic gas output, majorly due to the woes faced by RIL at its prolific KG-D6 basin the volumes for gas pipeline companies is expected to be muted and flat. While the R-LNG imports might be used to make up for the supply deficits, the same would impact the margins of gas companies like GAIL and GSPC etc. GAIL would additionally feel the pinch of a higher subsidy allocation bill. Gujarat Gas and Indraprastha Gas would however benefit from the prices hikes that were taken during the quarter to mitigate the fall in margins. Petronet LNG would continue its excellent performance as the current business environment continues to favor the company’s business model.

In conclusion, the March quarter for the Indian oil & gas industry is expected to be a mixed bag performance where the OMC’s may see a turnaround in their losses owing to a higher subsidy allocation from and increased discounts from the upstream companies. However, the same is expected to burden the upstream major who may see a significant drop in their net realizations. Private players would continue to suffer as a result of fading GRM’s, while lower domestic gas output may hurt the volumes for gas pipeline companies.