Oil & Gas - Sector Update - Key trends: What's changed from Q1? - Elara Capital

Sharp GRMs recovery: SG complex GRMs for Q2FY13 have improved to USD9.1/bbl from USD6.7/bbl in Q1FY13 led by improvement across the product slate. Spreads for gasoline, diesel and jet fuel have all expanded, with reduced negative spreads for naphtha/LPG in Q2FY13.

Impact/View: This implies healthy Q2FY13 GRMs for RIL despite some contraction in the L-H crude spreads. While most of this uptick has been captured in RIL's recent rally, if GRMs stay above USD9/bbl for Q2 & Q3, then we may see a strong re-rating of RIL ref. valuations which the Street is valuing assuming GRMs of USD8-8.5/bbl.

Oil prices and INR largely stable QoQ: Brent prices averaged USD110 for Q2FY13 vs. USD109 in Q1FY13, while INR was 55.2 vs. 54.0 in Q1FY13. Impact/View: Despite high volatility, the quarterly trend in oil prices has been surprisingly stable. In terms of earnings, pricing impact for Cairn should be minimal, while upstream PSUs should be happy if they make similar INR realizations as Q1FY13 as these are already benefitting from INR depreciation.

Fuel reforms from Oil Min: The Govt. raised diesel prices by INR5/bbl, reduced petrol excise duty by INR5.3/litre (offset by INR1.5/litre duty in diesel) and capped LPG cylinders to 6/family. Impact/View: While this is a short term relief, the longer term pain of high UR remains. The URs are expected to be INR1.7trn despite these measures. Our top pick remains BPCL in this space due to downside protection and upside potential from its E&P segment.

Inventory losses to reverse for refiners: INR/bbl has closed at INR5,915/bbl at Sep-close vs. INR5,397/bbl at Jun-close. Impact/View: With an increase in INR/bbl, refiners should see inventory gains in Q2FY13 on crude as well as products. Our rough estimates suggest that the inventory gain should be USD3.3/bbl - USD4.4/bbl, assuming 15/20 days of inventory respectively. In absolute amounts, as a benchmark this should work out to be INR1.3/1.7bn for every 1MMT of throughput for 15/20 days on inventory.

Spot LNG prices down to USD11/mmBTU: The bigger question remains whether this recent decline in spot LNG prices is sustainable so as to drive a secular demand trend for imported LNG in India. Despite this, with shortage of LNG infrastructure in India, we remain positive on Petronet LNG due to expansion plans, while we are neutral on pipeline players (GAIL/GSPL) due to concerns of domestic volumes.

Provisional tariff order for GSPL: The PNGRB has determined INR23.99/mmBTU as the tariff for GSPL, lower by 12.5% than its current tariff of INR27.4/mmBTU. Impact/View: While the new tariff is lower than the current, it was still higher than the ultra-conservative Street assumptions, leading to a decent rally in GSPL. However, we continue to believe that volumes are a big driver for a fundamental re-rating and think that the stock may languish for a while before experiencing a strong rally.

Some more stake sale from Cairn Energy: Cairn Energy sold 152.7mn shares of Cairn India for INR318-327/sh bringing down its taka to 10.3% from 18.3%. Impact/View: The stock price decline due to this is an ideal short-term opportunity for investors for an 8-10% up move as we estimate the fair price to be INR365/sh.

Source : Equity Bulls

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