December 2017 Quarter Result Preview Institutional Equities Oil & Gas Sector 8 January 2018 Higher Crude Oil Prices To Result In Inventory Gains We expect 60%/4.4%/3.7%/6.5% QoQ growth in the December 2017 quarter earnings of Indian Oil Corporation (IOCL), Hindustan Petroleum Corporation (HPCL), Bharat Petroleum Corporation (BPCL) and Indraprastha Gas (IGL) respectively. The growth in earnings will be primarily driven by: 1) Inventory gains led by increase in average crude oil price from US$50.42/bbl in 2QFY18 to US$59.15/bbl in 3QFY18. 2) Increase in throughput for IOCL from 16.1mmt to 18.4mmt as it faced plant shutdown in the previous quarter and capacity utilisation declined from 101.6% in 1QFY18 to 92.3% in 2QFY18. 3) Increase in compressed natural gas (CNG) and piped natural gas (PNG) sales by 8% and 3% QoQ, respectively. However, the growth in earnings will be capped by: 1) Decline in average Singapore gross refining margin or GRM from US$8.23/bbl in 2QFY18 to US$7.25/bbl in 3QFY18 as the Hurricane Harvey impact tapered off and major refineries operated at their normal capacity. Rise in crude oil prices may lead to inventory gains: Average crude oil price increased from US$50.42/bbl in 2QFY18 to US$59.15/bbl in 3QFY18 leading to inventory gains. Crude oil prices increased on account of: 1) Repair to Britain s Forties crude oil pipeline in North Sea which was closed as cracks were revealed on routine inspection. The pipeline carried around 450,000bbl a day of Forties crude oil to Britain. Forties pipeline shutdown took place on 11 December 2017, but it is now fully operational. 2) A pipeline supplying crude oil to Es Sider Port was blown up in Libya causing a decline in supply by 90,000bbl per day. 3) OPEC (Organisation of Petroleum Exporting Countries) extended the 1.8mn bbl per day production cut from March 2018 to the end of 2018. Normal production from IOCL: IOCL reported capacity utilisation of 92.3% in 2QFY18 versus 101.6% in 1QFY18. Lower capacity utilisation in 2QFY18 was on account of plant shutdown and we expect its refineries to operate normally in 3QFY18. The shutdown took place in Mathura, Panipat, Barauni and Gujarat refineries. CNG and PNG sales rise: CNG and PNG sales rose on account of: 1) Additional volume from expansion in Rewari and Gurugram. 2) Increased fuel supply conversion in private vehicles because of cost benefit and pollution concerns. 3) PNG volume on the rise as it is cheaper, convenient and a safer alternative to other cooking fuels. Singapore GRM registers a decline of about US$0.98/bbl: Average Singapore GRM declined from about US$8.23/bbl in 2QFY18 to US$7.25/bbl in 3QFY18. The impact of Hurricane Harvey - which had caused Singapore GRM to touch around US$11/bbl in the first week of September 2017 - has now tapered down as refineries in the US have resumed normal operations. Short-lived increase in crude oil prices to benefit earnings: We expect earnings growth of 60%/4.4%/3.7%/ 6.5% for IOCL/HPCL/BPC and IGL respectively. The growth in earnings will be primarily driven by: 1) Inventory gains led by increase in crude oil prices from US$50.42/bbl in 2QFY18 to US$59.15/bbl in 3QFY18. 2) Increase in throughput for IOCL from 16.1mmt to 18.4mmt as it faced plant shutdown in the previous quarter, and capacity utilisation slipping from 101.6% in 1QFY18 to 92.3% in 2QFY18. 3) Increase in CNG and PNG sales by 8% and 3% QoQ, respectively. However, inventory gains are not sustainable as supply increases from the US and the pipelines in Libya and North Sea start operating at their normal capacity. We are bullish on the city gas distribution or CGD segment and expect gas consumption to grow driven by cost benefits, pollution concerns and expansion in areas like Rewari and Gurugram. Amit Agarwal Research Analyst amit.agarwal@nirmalbang.com +91-22-6273 8033 Akash Mehta Research Associate akash.mehta@nirmalbang.com +91-22-6273 8062 (Rsmn) CMP TP (Rs) Rating Upside/ Sales EBITDA EBITDA margin (%) PAT Company Downside (Rs) 3QFY18E YoY(%) QoQ(%) 3QFY18E YoY(%) QoQ(%) 3QFY18E 3QFY17 2QFY18 3QFY18E YoY(%) QoQ(%) IOCL 384 357 Sell (7) 1,175,584 1.7 6.3 107,377 35.1 45.6 9.1 6.9 6.7 59,049 47.8 59.7 HPCL 414 321 Sell (22) 568,903 2.4 4.7 30,413 8.5 4.7 5.3 5 5.3 18,107 13.9 4.4 BPCL 489 478 Acc. (2) 662,662 3.4 3.3 36,911 11.3 4.6 5.6 5.2 5.5 24,436 7.6 3.7 IGL 330 394 Buy 19 12,681 33.9 12.6 2,976 20.5 5.7 23.5 26.1 25.0 1,799 24.2 6.5 Grand total 2,419,830 2.4 5.1 177,678 24.1 26.1 10.8 10.6 10.9 103,391 29.2 29.9 Source: Nirmal Bang Institutional Equities Research
Exhibit 1: December 2017 quarter estimates IOCL 3QFY17 2QFY18 3QFY18E YoY (%) QoQ (%) Throughput (mmt) 16.4 16.1 18.4 12.2 13.9 GRM 7.7 7.8 8.3 8.7 6.4 Market sales (mmt) 20.1 19.9 20.0 (0.6) 0.5 Tax (%) 35 33 33 N/A N/A Revenues (Rsmn) 1,156,449 1,106,371 1,175,584 1.7 6.3 EBITDA (Rsmn) 79,486 73,733 107,377 35.1 45.6 PAT(Rsmn) 39,949 36,964 59,049 47.8 59.7 HPCL 3QFY17 2QFY18 3QFY18E YoY (%) QoQ (%) Throughput (mmt) 4.7 4.6 4.4 (5.2) (4.7) GRM 6.4 7.7 8.0 25.0 4.6 Market sales (mmt) 9.3 8.7 9.0 (2.6) 3.4 Tax (%) 34 33 33 N/A N/A Revenues (Rsmn) 555,407 543,358 568,903 2.4 4.7 EBITDA (Rsmn) 28,033 29,056 30,413 8.5 4.7 PAT(Rsmn) 15,903 17,347 18,107 13.9 4.4 BPCL 3QFY17 2QFY18 3QFY18E YoY (%) QoQ (%) Throughput (mmt) 6.8 7.0 7.0 3.7 0.4 GRM 5.9 8.0 8.3 41.3 4.1 Market sales (mmt) 9.8 10.4 10.4 6.6 0.3 Tax (%) 30 32 32 N/A N/A Revenues (Rsmn) 640,957 641,273 662,662 3.4 3.3 EBITDA (Rsmn) 33,165 35,276 36,911 11.3 4.6 PAT(Rsmn) 22,719 23,574 24,436 7.6 3.7 IGL 3QFY17 2QFY18 3QFY18E YoY (%) QoQ (%) CNG volume (SCM) 320 347 374 16.9 7.7 PNG volume (SCM) 104 120 124 18.9 3.0 Average sales (per SCM) 24.6 26.7 28.3 15.0 6.2 Average cost of sales (per SCM) 12.2 12.7 14.3 17.4 13.0 Tax (%) 32 35 35 N/A N/A Revenues (Rsmn) 9,467 11,261 12,681 33.9 12.6 EBITDA (Rsmn) 2,470 2,816 2,976 20.5 5.7 PAT (Rsmn) 1,448 1,689 1,799 24.2 6.5 Source: Respective companies, Nirmal Bang Institutional Equities Research 2 Oil & Gas Sector
10/2/2017 10/2/2017 10/9/2017 10/9/2017 10/16/2017 10/16/2017 10/23/2017 10/23/2017 10/30/2017 10/30/2017 11/6/2017 11/6/2017 11/13/2017 11/13/2017 11/20/2017 11/20/2017 11/27/2017 11/27/2017 12/4/2017 12/4/2017 12/11/2017 12/11/2017 12/18/2017 12/18/2017 12/25/2017 12/25/2017 1/3/2017 1/3/2017 1/24/2017 1/24/2017 2/14/2017 2/14/2017 3/7/2017 3/7/2017 3/28/2017 3/28/2017 Institutional Equities 4/18/2017 4/18/2017 5/9/2017 5/9/2017 5/30/2017 5/30/2017 6/20/2017 6/20/2017 7/11/2017 7/11/2017 8/1/2017 8/1/2017 8/22/2017 8/22/2017 9/12/2017 9/12/2017 10/3/2017 10/3/2017 10/24/2017 10/24/2017 11/14/2017 11/14/2017 12/5/2017 12/5/2017 12/26/2017 12/26/2017 Exhibit 2: Singapore refinery margin and crude oil price (US$/bbl) 9.5 3QFY18 Singapore margin- daily 11 1-year Singapore margin - daily 9.0 10 8.5 9 8.0 8 7.5 7 7.0 6 6.5 5 6.0 4 66 3QFY18 Dubai Asia FOB - first month 70 1-year Dubai Asia FOB - first month 64 65 62 60 58 56 54 52 60 55 50 45 40 50 35 Source: Nirmal Bang Institutional Equities Research 3 Oil & Gas Sector
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