Gas utilities, OMCs seen shining in June quarter

Lower gas prices to up volumes and margins of gas utilities as inventory gains drive OMCs in quarter

Thanks to falling prices of liquefied natural gas (LNG), gas utility companies are pegged as outperformers in the oil and gas sector in the first quarter (Q1) of FY17. Gas Authority of India Ltd (GAIL), Petronet LNG, Indraprastha Gas Ltd (IGL), Mahanagar Gas Ltd (MGL), and Gujarat State Petronet are seen benefitting via higher volumes and margins. Lower LNG prices have boosted demand and will, thus, increase volumes and margins for gas companies.

This, along with higher rates, will aid Petronet’s performance in Q1. Pollution control norms and implementation of the odd-even rule in Delhi augur well for IGL, while GAIL will gain from the listing of its subsidiary MGL and higher rates.

Oil marketing companies (OMCs) — Indian Oil Corporation (IOC), Bharat Petroleum Corporation Ltd (BPCL) and Hindustan Petroleum Corporation Ltd (HPCL) — could continue to gain. Brent crude oil prices are up 34 per cent sequentially in Q1, benefitting OMCs through inventory gains. Consequently, downstream firms' sequential revenue growth could rise and offset weakness in gross refining margins (GRMs). The benchmark GRM was $5 a barrel versus $7.7 in the March quarter.

Though under-recoveries could rise due to higher kerosene prices, analysts say this burden will be borne by the government. In fact, the government recently allowed a 25 paise monthly increase in kerosene price (till April 2017), a move that has instilled further confidence in its reform initiatives.

Among OMCs, IOC stands to benefit the most on a sequential basis after the reversal of high inventory losses in the base quarter. The Street will also watch out for any improvement in capacity use at IOC’s Paradip refinery. Better profitability of its Bhatinda refinery will be a positive for HPCL. BPCL will benefit from better performance of its Bina refinery.

Flip side: Upstream firms’ performance could remain weak. Oil and Natural Gas Corporation (ONGC) and Oil India could benefit from higher realisations and production. While Cairn India will gain from higher realisations, its production might remain flat on a sequential basis, say analysts led by Anil Sharma of Nomura. Lower prices of domestic gas could pull down ONGC (Oil and Natural Gas Corporation) and Oil India's profitability.

On a sequential basis, Reliance Industries could see some moderation in its June quarter net profit growth due to weakness in refinery business and Singapore GRMs. Lower domestic gas prices and flat production will put pressure on its exploration and production business, while plant maintenance shutdown could impact output. Improving polyester margins could provide earnings support.