Favourable energy prices and margins to support OMCs/upstream earnings

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    Emkay Global Financial Services has released a report on Oil & Gas industry. It notes that despite perceived volatility in energy prices and margins, key parameters for Indian OMCs and upstream companies are steady and there is no risk of core earnings downgrade. Emkay Global does not anticipate major inventory losses for OMCs in Q3FY22.

    GRMs hover at mid-cycle range; auto-fuel margins up at almost Rs 9/litre: Singapore benchmark margins, after rising to the recent peak of USD8/bbl+, currently stand at the USD5-6 range, which is a mid-cycle level and implies steady earnings for OMCs.

    The checks suggest forward cracks are steady till March 2022 on the back of global recovery, despite the omicron threat and slower demand growth in India. After the last reduction in excise duty and VAT, OMCs have kept petrol/diesel prices largely unchanged for nearly 50 days now. As Brent corrected from its peaks of almost USD 90/bbl to USD 70-75/bbl, gross marketing margins expanded and current accounting margins stood at a high of almost Rs9/ltr for petrol/diesel. If OMCs could maintain such margins till January 2022-end, they could report Q4 average margins above normative levels despite major elections in Punjab and Uttar Pradesh in Feb-March 2022, unless oil prices spike.

    Brent overall stable, but recent winter surge to lift APM further: Brent saw volatility, with prices falling by almost USD20/bbl from the recent peaks due to omicron fears and the release of strategic reserves by major oil consumers amid rising OPEC+ output. Nevertheless, prices remain above USD70/bbl due to a deficit market and a sharp spike in global gas prices. Emkay Global expect a limited downside risk to our USD75/70 per barrel assumptions for FY22/23. However, APM (domestic) gas prices would cross our estimate of USD4.5/mmbtu GCV in April 2022, as the recent spike in NBP prices implies that the next revision will be to USD6.5/mmbtu+. Steady oil prices and higher-than-expected gas prices bode well for ONGC and Oil India. For every USD1/mmbtu change in APM price, ONGC/Oil India’s FY23 standalone EPS will change by Rs 2.4/Rs 4.5 per share, or 10%/12%.

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    Emkay Global reiterates a ‘Buy’ on ONGC, Oil India, IOCL and BPCL; upgrades HPCL from ‘Hold’ to ‘Buy’.

    It retained a ‘Buy’ on ONGC, Oil India, IOCL and BPCL and upgrade HPCL from ‘Hold’ to ‘Buy’ due to the recent correction in stock prices.

    The delay in BPCL’s disinvestment is a dampener, though the valuation remains attractive.