Oil & Gas Firms Stand To Gain From Higher Crude Prices, Refining Margins In Q3

Higher crude oil prices and gross refining margins (GRM) could translate into a strong earnings season for oil and gas companies.

For the December ended quarter, the seven oil and gas firms are expected to report a three percent decline in revenue on a quarter-on-quarter basis. Net profit is expected to rise 15 percent, and the earnings before interest, depreciation and amortisation (EBITDA) may increase by 23 percent, according to Bloomberg consensus estimates.

Crude oil prices and the GRMs saw a sharp uptick of nine percent and 31 percent, respectively, on a quarter-on-quarter basis, which will benefit oil marketing companies (downstream), like Reliance Industries Ltd., Indian Oil Corporation Ltd., and Bharat Petroleum Corporation Ltd., by way of inventory gains and significantly improved refining margins.

For upstream companies like Oil and Natural Gas Ltd. (ONGC) and Oil India Ltd., higher global crude oil prices could result in improved realisations, which will help off-set the flat production volumes. Absence of any subsidy burden also implies improvement in net realisations of ONGC and Oil India.

GAIL India Ltd., however, will benefit from higher gas and petro-chemical volumes. For Indraprastha Gas Ltd., margins are expected to improve on account of a cut in domestic gas prices in October. However, minimal negative impact of demonetisation on compressed natural gas volume growth can be expected.

Oil And Natural Gas Corporation

• EBITDA is expected to rise sequentially on the back of rising crude oil prices which will also offset the cut in domestic gas prices.
• On the volume front, oil and gas production is expected to remain flat, quarter-on-quarter.
• Crude oil realisations are expected to increase around 5 percent, quarter-on-quarter, to $50 per barrel.
• Guidance on future capital expenditure, commentary on oil and gas production volumes and details about the new investments in Gujarat State Petroleum’s oil block will be key things to watch.

Oil India

• Revenue is expected to rise 10.5 percent, compared to last quarter, while EBITDA is expected to increase by 11 percent on the back of higher crude oil prices.
• Growth is strongly led by higher crude oil realisations as the volumes are expected to remain flat, quarter-on-quarter.
• Management commentary on volume growth, future capital expenditures and recent acquisitions in Russia will be crucial.

GAIL India

• GAIL India Ltd. is expected to continue its growth trend on the back of lower liquefied natural gas prices and higher gas transmission/trading volume along with better petro-chemical volume.
• EBITDA is expected to rise 11 percent, led by turnaround in petro-chemical division profitability and likely higher gas transmission profitability.
• Profitability in petro-chemical and gas trading business, progress of pipeline projects worth $4 billion and pending tariff revision will be key things to watch.

Reliance Industries

• Maintenance shutdown, lower petro-chemicals earnings, may offset strong refining quarter, resulting into a largely flattish quarter-on-quarter growth.
• Gross refining margins are expected to increase 9 percent, compared to last quarter, to $11 per barrel.
• Updates on Reliance Jio, downstream projects and capital expenditures will be key to look out for.

Indian Oil Corporation

• Net profit is expected to jump 61 percent, compared to last quarter, led by a sharp uptick in GRMs resulting into inventory gains.
• GRM is expected to double to $9 per barrel, while volumes are expected to remain flat, quarter-on-quarter.
• Management commentary on Paradip refinery, gross refining margins and future capital expenditure plans will be important.

Bharat Petroleum Corporation

• Higher refining margins, inventory gains and marketing margins are expected to result in 65 percent growth in BPCL’s profit.
• GRM is expected to double to $7.6 per barrel, while volumes are expected to remain flat, quarter-on-quarter.
• Update on impact of inventory and forex changes, Mozambique and Brazil explorations and production blocks and expansion plans for the Kochi refinery will be key to watch.

Indraprastha Gas

• Profitability is expected to improve year-on-year led by lower reduction in CNG prices as against gas prices.
• Company’s net profit would decline by 5 percent, compared to previous quarter as total volumes may drop around 2 to 3 percent due to demonetisation.
• Company’s outlook on CNG volumes and gas prices will be crucial.

(These expectations have been compiled from reports of Jefferies, PhillipCapital, Edelweiss, Motilal Oswal and IDBI Capital, Antique Stock Broking, Religare, HDFC Securities, Emkay, Ambit.)