Outlook on Oil & Gas Sector 1 st February Sumit Pokharna

Transcription

1 Budget Analysis Outlook on Oil & Gas Sector 1 st February rd August 2018 Sumit Pokharna Sector Analyst

2 Upstream Sector - Oil and Gas Exploration In some countries the government runs the oil companies and in many others the oil companies runs the government

3 What is Crude Oil? Let s start from the start Crude oil is a naturally-occurring substance found in certain rock formations in the earth. Crude oil is classified as a hydrocarbon - compound containing carbon and hydrogen. It s sister hydrocarbon is natural gas which is also extracted from earth. The demand for crude oil is derived from the demand for petroleum products such as gasoline, diesel etc. Oil is measured in barrels and Gas in mmscm/cubic feet

4 What s in a Barrel of Crude Oil? What differentiates Brent, WTI, Dubai crude? Source: EIA/IEA

5 Analysis of higher margins & Competitive positioning Why RIL GRMs is better than OMCs? Theortical refining margins based on product and crud Prices Theortical refining margins based on product and crud Prices NCI NCI--14 US$/bbl Product slate Cracks Product Cracks US$/bbl Product slate Cracks Product Cracks Diesel (10 ppm sulfur or Euro IV) 44% Diesel (50 ppm sulfur or Euro III) 40% Gasoline 30% Gasoline 11% Jet/Kerosene 4% Jet/Kerosene 8% Alkylates 8% LPG 13% LPG 0% Naphtha 3% Naphtha 0% Propylene 8% Propylene 3% Reformate 0% Reformate 9% Petroleum Coke 9% Petroleum Coke 9% Sulfur 2% Wighted average product prices 100% 6.6 Wighted average product prices % 7.4 Crude Spread 5.7 Crude Spread 7.6 Theortical refining margins 12.3 RPL's theortical refining margins 15.0 Around $2/bbl better margins due to crude spread Source: Kotak Securities - Private Client Research.

6 Our view on Brent crude oil price We remain bullish on international crude oil prices

7 Never Say Never Again (BRENT: US$ 147 / 28 / 73 bbl) Brent crude oil price remains in a bullish phase and could spike to US$80-90/bbl due to Geopolitical concerns Supply shocks Tight demand-supply balance amid declining production and Sustained production cuts despite targeted moderation of OECD inventories

8 Feb-11 Jun-11 Oct-11 Feb-12 Jun-12 Oct-12 Feb-13 Jun-13 Oct-13 Feb-14 Jun-14 Oct-14 Feb-15 Jun-15 Oct-15 Feb-16 Jun-16 Oct-16 Feb-17 Jun-17 Oct-17 Feb-18 Jun-18 Socio-economic crises in Venezuela led to sharp decline in oil production Sharp decline in oil production 2.6 Venezuela oil production mn b/d Source: Bloomberg

9 Geo-political Risk: USA sanctions on Iran will impact supply from Iran Aug-11 Dec-11 Apr-12 Aug-12 Dec-12 Apr-13 Aug-13 Dec-13 Apr-14 Aug-14 Dec-14 Apr-15 Aug-15 Dec-15 Apr-16 Aug-16 Dec-16 Apr-17 Aug-17 Dec-17 Apr Source: Bloomberg

10 Incremental global oil demand expectations of the key agencies (2018) Incremental global oil demand expectations (mn b/d) Source: Bloomberg IEA EIA OPEC

11 International Energy Agency Crude Oil Demand World Total World oil demand growth YoY (mopd) mopd Description Total Demand OECD Demand Americas Europe Pacific Non-OECD Demand FSU Europe China Other Asia Latin America Middle East Africa Total Supply OECD Supply Americas Europe Pacific Non-OECD Supply FSU Europe China Other Asia Latin America Middle East Africa Processing Gains Global Biofuels Total Non-OPEC OPEC Total OPEC Source: Bloomberg

12 Global demand was higher than global supply in 2017 mbopd Demand-Supply dynamics Global Crude oil demand Global Crude oil Supply Source: Bloomberg

13 13-Jan-17 3-Feb Feb Mar-17 7-Apr Apr May-17 9-Jun Jun Jul Aug-17 1-Sep Sep Oct-17 3-Nov Nov Dec-17 5-Jan Jan Feb-18 9-Mar Mar Apr May-18 1-Jun Jun Jul-18 Mn bbls U.S. crude oil inventory levels Despite meaningful jump in US oil production, inventory levels still remains lower 555 U.S. crude inventories (LH) U.S. crude production (RH) Aug-18 mbopd Source: Bloomberg

14 Dec-14 Jan-15 Mar-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Relationship between Dollar Index vs Brent Crude Inverse relationship 150 Brent Dollar Index Source: Bloomberg

15 Higher bond yields (%) Nov-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Keep a close watch Negative for equities and other asset classes 3.3 US Treasury 10-year Yield (R) Source: Bloomberg

16 Impact of rising crude oil prices on India CAD Fiscal deficit Twin deficit risk Impact of higher crude oil prices on India Inflation - CPI and WPI Bond yields Currency Depreciati on Subsidy SELL OMCs Source: Kotak Securities - Private Client Research.

17 Sensitivity Analysis Crude oil and India s GDP Oil can hurt India s GDP Particulars Units India's annual net Imports MMTPA Assuming crude price rise $/bbl 10.0 Import bill rise $ bn 11.3 Nominal GDP at market prices $ Tn 2.8 Forex INR/USD 68.0 Sensitivity for every US$10/bbl move in oil to GDP (%) bps 41 Source: Kotak Securities - Private Client Research. India is a net importer of ~3 mn barrels/ day of crude oil. India s oil import dependence to oil consumption is 81%-83%. This makes us highly sensitive to crude oil price movement. This implies a sensitivity of ~US$11bn i.e 41 bp of GDP for every US$10/bbl move in oil

18 India s rising crude oil import bill Rising bill India s Crude oil import bill US$ Bn FY14 FY15 FY16 FY17 FY18 FY19E Source: PPAC

19 Impact on Indian currency 2-Jan-18 8-Jan Jan Jan Jan Jan-18 6-Feb Feb Feb Feb-18 5-Mar-18 9-Mar Mar Mar Mar-18 5-Apr Apr Apr Apr Apr-18 7-May May May May May-18 4-Jun-18 8-Jun Jun Jun Jun-18 2-Jul-18 6-Jul Jul Jul Jul Jul-18 3-Aug-18 9-Aug Aug-18 Double whammy Can INR go to 75? INR/USD depreciated by 6.7% since April 18 due to trade war issues, Fed rate hike and rising fiscal deficit Source: Bloomberg Fiscal slippage likely ahead of the general election due to be held in April-May 2019

20 What if government cuts Excise duty on petrol and Diesel Impact of Rs.3/ltr cut in excise duty on Petrol/Diesel If the government takes the entire hit from hereon then it will impact fiscal deficit by 23 bp of GDP Impact of Excise duty Units Petrol Diesel Consumption pa FY19E Mn Ton Consumption pa Mn Lts 39, ,985 Assuming excise duty cut Rs./ltrs 3 3 Excise revenue loss to Govt Rs. Mn 117, ,954 Total revenue loss on Petrol and Diesel Rs. Mn 429,401 Nominal GDP at market prices Rs. Bn Forex INR/USD 68 Sensitivity for Rs.3/ltr cut in excise duty on Petrol and Diesel bps 23 Source: Kotak Securities - Private Client Research.

21 Rising crude price Good or Bad? A crucial analysis of crude price movement and its impact on the bottom-line of various players in O&G sector in India

22 Crude Price & Earnings Sensitivity Crude Oil Prices Below $50/bbl At $50-60/bbl Above $60/bbl Upstream realizations are under pressure, No under recoveries for OMCs OMCs uncertain, ONGC benefits Party time for Pvt. Companies, PSUs cries. Upstream: Lower realization. Negative for ONGC, Vedanta PSU OMCs: Uncertain on earnings as subsidy sharing is unknown Pvt: Realiz. boom, refining margins Inc. Risk: windfall tax. OMCs: Higher marketing Margins to offset pressure on refining margins.govt. may cut prices GAS: Spot LNG markets will be hit. Negative for Petronet LNG ONGC:Rising realization offsets higher U/R. Pvt Co s: Stable earnings PSU: Significant rise in under recoveries, ltd. possibilities of auto fuels price hikes. Positive for: IOC, BPCL HPCL, RIL, MRPL, CPCL Negative for ONGC, OIL India, Vedanat Positive for: RIL, ONGC, Negative for: IOC, BPCL and HPCL. Positive for: Vedanta Selan, HOEC, PLNG Negative for: IOC, BPCL, and HPCL. Source: Kotak Securities - Private Client Research.

23 Impact on companies Due to election heavy year, if the government caps retail fuel price hike and partly passes on some subsidy burden to OMCs then earnings will get impacted. Traditionally, upstream oil co s had to share the subsidy which is sentimental negative for ONGC/OIL. However, we believe CMP of ONGC already discounts US$45/bbl of net crude realizations at current levels of global crude prices. Also, higher domestic gas prices and weaker rupee will be positive. Higher bond yields may impact NIM compression for NBFCs. Rising oil is also a negative for users of oil-based chemicals industry including consumer staples and paints. Weak INR is positive for exporters.

24 Brent crude oil price and Singapore Jet Kerosene (USD/bbl) Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Jet prices increase is impacting margins of Airline companies. Weaker rupee against dollar will further add to woes. Higher Jet Kerosene prices will led to higher working capital, interest cost and higher operating cost Crude Oil (Brent) Singapore Jet Kerosene USD/Barrel Source: Bloomberg

25 Stock views Price Latest Upside/ EPS (Rs) PE (x) RoE (%) EV/EBITDA (x) Name of the Company Latest as on price (Down Reco ^ 20-Aug-18 target^ side) FY19E FY20E FY19E FY20E FY19E FY20E FY19E FY20E (Rs) (Rs) (%) BPCL (0.3) Castrol India Ltd * * BUY Chennai Petroleum Corporation BUY GAIL (India) BUY HPCL REDUCE IOCL REDUCE (5.5) ONGC ADD Reliance Industries SELL 1, (20.2) Gujarat State Petronet Ltd (GSPL) SELL (4.8) Indraprastha Gas (IGL) SELL (9.5) Mahanagar Gas Ltd ACCUMULATE 923 1, MRPL BUY Oil India Ltd BUY Petronet LNG BUY Kotak Securities - Private Client Group - Path: Login to > Research > Equity Reports > Stock Recommendation Snapshot Kotak Securities - Institutional Equities - Path: Login to > Research > Equity Reports > India Daily Institutional Equities Research Report

26 Disclaimer Disclosure/Disclaimer Kotak Securities Limited established in 1994, is a subsidiary of Kotak Mahindra Bank Limited. Kotak Securities is one of India's largest brokerage and distribution house. Kotak Securities Limited is a corporate trading and clearing member of Bombay Stock Exchange Limited (BSE), National Stock Exchange of India Limited (NSE), Metropolitan Stock Exchange of India Limited (MSE). Our businesses include stock broking, services rendered in connection with distribution of primary market issues and financial products like mutual funds and fixed deposits, depository services and Portfolio Management. Kotak Securities Limited is also a depository participant with National Securities Depository Limited (NSDL) and Central Depository Services (India) Limited (CDSL). Kotak Securities Limited is also registered with Insurance Regulatory and Development Authority as Corporate Agent for Kotak Mahindra Old Mutual Life Insurance Limited and is also a Mutual Fund Advisor registered with Association of Mutual Funds in India (AMFI). We are registered as a Research Analyst under SEBI (Research Analyst) Regulations, We hereby declare that our activities were neither suspended nor we have defaulted with any stock exchange authority with whom we are registered in last five years. However SEBI, Exchanges and Depositories have conducted the routine inspection and based on their observations have issued advise/warning/deficiency letters/ or levied minor penalty on KSL for certain operational deviations. We have not been debarred from doing business by any Stock Exchange / SEBI or any other authorities; nor has our certificate of registration been cancelled by SEBI at any point of time. We offer our research services to clients as well as our prospects. This document is not for public distribution and has been furnished to you solely for your information and must not be reproduced or redistributed to any other person. Persons into whose possession this document may come are required to observe these restrictions. This material is for the personal information of the authorized recipient, and we are not soliciting any action based upon it. This report is not to be construed as an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. It is for the general information of clients of Kotak Securities Ltd. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. We have reviewed the report, and in so far as it includes current or historical information, it is believed to be reliable though its accuracy or completeness cannot be guaranteed. Neither Kotak Securities Limited, nor any person connected with it, accepts any liability arising from the use of this document. The recipients of this material should rely on their own investigations and take their own professional advice. Price and value of the investments referred to in this material may go up or down. Past performance is not a guide for future performance. Certain transactions -including those involving futures, options and other derivatives as well as non-investment grade securities - involve substantial risk and are not suitable for all investors. Reports based on technical analysis centers on studying charts of a stock's price movement and trading volume, as opposed to focusing on a company's fundamentals and as such, may not match with a report on a company's fundamentals. Opinions expressed are our current opinions as of the date appearing on this material only. While we endeavor to update on a reasonable basis the information discussed in this material, there may be regulatory, compliance or other reasons that prevent us from doing so. Prospective investors and others are cautioned that any forward-looking statements are not predictions and may be subject to change without notice. Our proprietary trading and investment businesses may make investment decisions that are inconsistent with the recommendations expressed herein.

27 Disclaimer Kotak Securities Limited has two independent equity research groups: Institutional Equities and Private Client Group. This report has been prepared by the Private Client Group. The views and opinions expressed in this document may or may not match or may be contrary with the views, estimates, rating, target price of the Institutional Equities Research Group of Kotak Securities Limited. We and our affiliates/associates, officers, directors, and employees, Research Analyst(including relatives) worldwide may: (a) from time to time, have long or short positions in, and buy or sell the securities thereof, of company (ies) mentioned herein or (b) be engaged in any other transaction involving such securities and earn brokerage or other compensation or act as a market maker in the financial instruments of the subject company/company (ies) discussed herein or act as advisor or lender / borrower to such company (ies) or have other potential/material conflict of interest with respect to any recommendation and related information and opinions at the time of publication of Research Report or at the time of public appearance. Kotak Securities Limited (KSL) may have proprietary long/short position in the above mentioned scrip(s) and therefore may be considered as interested. The views provided herein are general in nature and does not consider risk appetite or investment objective of particular investor; readers are requested to take independent professional advice before investing. This should not be construed as invitation or solicitation to do business with KSL. Kotak Securities Limited is also a Portfolio Manager. Portfolio Management Team (PMS) takes its investment decisions independent of the PCG research and accordingly PMS may have positions contrary to the PCG research recommendation. Kotak Securities Limited does not provide any promise or assurance of favourable view for a particular industry or sector or business group in any manner. The investor is requested to take into consideration all the risk factors including their financial condition, suitability to risk return profile and take professional advice before investing. The analyst for this report certifies that all of the views expressed in this report accurately reflect his or her personal views about the subject company or companies and its or their securities, and no part of his or her compensation was, is or will be, directly or indirectly related to specific recommendations or views expressed in this report. No part of this material may be duplicated in any form and/or redistributed without Kotak Securities' prior written consent. Details of Associates are available on Research Analyst has served as an officer, director or employee of subject company(ies): No We or our associates may have received compensation from the subject company(ies) in the past 12 months. We or our associates have managed or co-managed public offering of securities for the subject company(ies) in the past 12 months: No We or our associates may have received compensation for investment banking or merchant banking or brokerage services from the subject company(ies) in the past 12 months. We or our associates may have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company(ies) in the past 12 months. We or our associates may have received compensation or other benefits from the subject company(ies) or third party in connection with the research report. Our associates may have financial interest in the subject company(ies). Research Analyst or his/her relative's financial interest in the subject company(ies): No By referring to any particular sector, Kotak Securities Limited does not provide any promise or assurance of favourable view for a particular industry or sector or business group in any manner. The investor is requested to take into consideration all the risk factors including their financial condition, suitability to risk return profile and take professional advice before investing. Such representations are not indicative of future results.

28 Disclaimer Kotak Securities Limited has financial interest in the subject company(ies) at the end of the month immediately preceding the date of publication of Research Report: Apollo Tyres, Bajaj Auto, BEL, Blue Dart, Castrol India, Concor, Engineers India, Greaves Cotton, Havells, Hero Moto Corp, Hindustan Unilever, Hindustan Zinc, IGL, IRB, ITC, JSW Steel, Kansai Nerolac, KNR Construction, L&T, M&M, Marico, Maruti, MGL, Motherson Sumi, MRF, Nalco, NBCC, Pidilite Ind, Shree Cement, Sterling Tools, Tata Motors, Tata Sponge, TV18 Broadcast, Ultratech Cement, VIP Ind, Voltamp, Voltas - Yes Our associates may have actual/beneficial ownership of 1% or more securities of the subject company(ies) at the end of the month immediately preceding the date of publication of Research Report. Research Analyst or his/her relatives has actual/beneficial ownership of 1% or more securities of the subject company(ies) at the end of the month immediately preceding the date of publication of Research Report: No. Kotak Securities Limited has actual/beneficial ownership of 1% or more securities of the subject company(ies) at the end of the month immediately preceding the date of publication of Research Report: No Subject company(ies) may have been client during twelve months preceding the date of distribution of the research report. "A graph of daily closing prices of securities is available at and (Choose a company from the list on the browser and select the "three years" icon in the price chart). Kotak Securities Limited. Registered Office: 27 BKC, C 27, G Block, Bandra Kurla Complex, Bandra (E), Mumbai CIN: U99999MH1994PLC134051, Telephone No.: , Fax No.: Website: Correspondence Address: Infinity IT Park, Bldg. No 21, Opp. Film City Road, A K Vaidya Marg, Malad (East), Mumbai Telephone No: SEBI Registration No: NSE INB/INF/INE , BSE INB /INF , MSE INE /INB /INF , AMFI ARN 0164, PMS INP and Research Analyst INH NSDL/CDSL: IN- DP-NSDL Our research should not be considered as an advertisement or advice, professional or otherwise. The investor is requested to take into consideration all the risk factors including their financial condition, suitability to risk return profile and the like and take professional advice before investing. Investments in securities market are subject to market risks, read all the related documents carefully before investing. Derivatives are a sophisticated investment device. The investor is requested to take into consideration all the risk factors before actually trading in derivative contracts. Compliance Officer Details: Mr. Manoj Agarwal. Call: , or ks.compliance@kotak.com. Level 1: For Trading related queries, contact our customer service at 'service.securities@kotak.com' and for demat account related queries contact us at ks.demat@kotak.com or call us on: Toll free numbers / , Offline Customers Level 2: If you do not receive a satisfactory response at Level 1 within 3 working days, you may write to us at ks.escalation@kotak.com or call us on and if you feel you are still unheard, write to our customer service HOD at ks.servicehead@kotak.com or call us on Level 3: If you still have not received a satisfactory response at Level 2 within 3 working days, you may contact our Compliance Officer (Mr. Manoj Agarwal ) at ks.compliance@kotak.com or call on 91- (022) Level 4: If you have not received a satisfactory response at Level 3 within 7 working days, you may also approach CEO (Mr. Kamlesh Rao) at ceo.ks@kotak.com or call on 91- (022)

29