Oil And Gas Companies Expected To Report Muted Second Quarter Earnings

Rangebound crude oil prices and refining margins, along with a stable currency, may translate into a muted earnings season for oil and gas companies.

For the July-September quarter, the top four oil and gas firms are expected to report an 8 percent rise in revenue on a quarter-on-quarter basis. Net profit is expected to fall 4 percent, and the earnings before interest, depreciation and amortisation (EBITDA) may increase by 3 percent, according to Bloomberg consensus estimates.

Indian Oil Corporation Ltd. and Bharat Petroleum Company Ltd. have been excluded from this calculation as their profit and EBITDA surged in the previous quarter on account of one-off charges related to inventory and foreign exchange movement.

Crude oil prices and the average currency rate (dollar-rupee) fell 0.7 percent and 0.1 percent respectively on a quarter-on-quarter basis, ensuring that energy firms did not face any sharp volatility during the three-month period.

For upstream companies like Oil and Natural Gas Ltd. and Oil India Ltd., flat volumes and realisations and no subsidy sharing burden during the quarter will help sustain profitability. GAIL India Ltd., however, will benefit from higher gas volumes and lower gas prices.

Downstream companies, like Reliance Industries Ltd., Indian Oil Corporation Ltd., and Bharat Petroleum Corporation Ltd., could see their sales volume grow but gross refining margins are likely to decline or remain flat. For Indraprastha Gas Ltd., margins are expected to improve on account of lower gas prices.

Oil and Natural Gas Corporation

• Oil and gas volumes are expected to remain flat or decline in the range of 2.7 to 3.5 percent.
• Crude oil realisation is expected to remain flat quarter on quarter.
• Subsidy sharing details, guidance on future capital expenditure, commentary on oil and gas production volumes and new investments in KG basin will be key things to watch.

Oil India

• Despite higher revenues, the EBITDA margin is expected to decline due to higher operating expenses.
• In the second quarter, higher gas volumes are expected to partially offset lower crude oil realisations.
• Management commentary on volume growth, future capital expenditures and recent acquisitions in Russia will be crucial.

GAIL India

• Higher gas volumes and lower gas prices will improve company’s profitability.
• Turnaround in the petrochemicals segment and higher gas transmission/trading volumes could drive growth.
• Clarity on pending rate revisions for key pipelines, transmission volumes post RasGas contract renegotiation and progress of pipeline projects will be key things to watch.

Reliance Industries

• Gross refining margins will sustain in double digits but may decline to around $10 per barrel from $11.5 per barrel in first quarter, according to brokerage estimates.
• Petrochemicals segment profitability is expected to increase year-on-year due to higher volumes and improved margins.
• Company’s new refining and petrochemical projects are likely to add to earnings but telecom business would be a drag on profitability.
• Update on gross refining margins, petrochemical margins, KG-D6 production and Reliance Jio will be crucial.

Indian Oil Corporation

• Gross refining margins are expected to see a sharp decline quarter on quarter. However, the company’s core earnings should improve due to higher marketing margins.
• Historical comparison is not meaningful due to one-off charges related to inventory and forex movement in the previous quarter.
• Refinery throughput is expected to increase due to the recently commissioned Paradip refinery being operational for the full quarter.
• Management commentary on Paradip refinery, gross refining margins and future capital expenditure plans will be important.

Bharat Petroleum Corporation

• The refinery throughput on a quarter on quarter basis for the company is expected to remain flat while gross refining margins will decline. Year-on-year both indicators are expected to rise.
• Historical comparison is not meaningful due to one-off charges related to inventory and forex movements in the previous 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

• Company is expected to report volume of 4.4 million metric standard cubic meters (mmscm) per day.
• Compressed natural gas (CNG) volumes saw an uptick last quarter and the trend is expected to continue led by an anti-pollution drive and the Supreme Court’s order to set-up CNG gas stations in Delhi.
• Profitability is expected to improve quarter-on quarter and year-on-year led by lower reduction in CNG prices as against gas prices.
• Company’s outlook on CNG volumes and gas prices will be crucial.

(These expectations have been compiled from reports of HDFC Securities, IDBI Capital, IDFC Securities, Motilal Oswal and PhillipCapital India Research.)