FY19 Oil and Gas Outlook: Increase in Proportion of Petrochemicals; Moderation in GRMs

India Ratings and Research (Ind-Ra) has maintained a stable outlook on both public and private oil and gas entities for FY19. Ind-Ra expects public companies to sustain their strong linkages with the government of India and maintain business stability in cases where ratings are based on standalone financial profiles. Upstream entities will benefit from a likely strong crude prices and a moderate subsidy burden in FY19. On the other hand, downstream entities would see a moderation in their gross refining margins (GRMs) during the period, driven by a decline in crack spreads and lack of inventory gains. Moreover, their continued capex is likely to lead to a moderate rise in leverage; however, their credit profiles would still remain comfortable.

Ind-Ra expects refiners across Asia-Pacific to increase the proportion of petrochemicals in their final output, as demand growth for petrol and diesel may weaken in the light of a growing global trend towards electric vehicles and cleaner fuels. In the long-term, Asia-Pacific is likely to register the highest petrochemical demand globally, driven by increased consumption of polymers. Petrochemicals producers with dual feed crackers would be better placed compared with those with single feed crackers on account of higher flexibility and better product portfolios. With new domestic capacities coming on stream in FY18, Ind-Ra expects polymer imports to decline in FY19.

Ind-Ra expects the GRMs of Indian refiners to moderate in FY19 from the firm levels in 1HFY18 and FY17, primarily driven by lower inventory gains. Furthermore, spot LNG price rebounded sharply to USD9.2/million British thermal units (mmbtu) in 3QFY18 from USD5.5/mmbtu in 1HFY18, making long-term contracts more favourable than spot purchases for FY19.

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