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Oil & Gas Preview: Oil prices, refining gains to drive earnings

ICICI Securities 18 Apr 2022

What’s Buzzing:

In the oil & gas coverage universe, uptrend in oil prices and refining product cracks will drive the profitability of upstream companies and oil marketing companies in Q4FY22. City gas distribution (CGD) companies’ earnings are expected to remain lower YoY due to high gas sourcing costs.

Context:

Average crude oil prices increased by US$20.1/bbl QoQ to US$99.5/bbl as Oil prices surged sharply amid concern over supply disruption following the geopolitical conflict in Europe. Hence, realisations of upstream companies are estimated to improve YoY as well as QoQ. On OMC front, gas oil & gasoline cracks increased by US$8.3/bbl & US$1.8/bbl QoQ, which will benefit refiners. However, marketing profits will be weaker QoQ as OMCs did not pass on higher oil costs.

Our Perspective:

APM and deepwater gas realisation are up 62% and 51% YoY, respectively. This will benefit upstream segments. Core GRMs of refiners are expected to improve QoQ and will be in the range of US$10-11/bbl. Refining segment earnings will be further supported by inventory gains. On the marketing front, marketing volumes are expected to grow in the range of 4-5% YoY. In terms of marketing margins, we estimate weaker profitability QoQ as OMCs did not pass on higher crude oil costs to customers in February and initial period of March. We expect overall profitability for OMCs to remain higher QoQ on account of refining gains. Sales volumes of CGD companies with high CNG contribution is expected to grow ~19% YoY while companies with high PNG contribution in sales mix are expected to report sales decline due to lower industrial offtake. CGD companies are expected to incur high gas sourcing costs as spot LNG prices continue to remain at elevated levels. Hence, gross margins are expected to decline YoY in range of Rs 1-6/scm YoY. Overall, we believe prevailing product cracks augur well for refiners while margins to be subdued for CGDs.

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