Oil, Gas: Revenue growth to slide

Higher crude oil prices, weak GRMs & petchem margins to affect profitability

The fourth quarter earnings of oil and gas companies in 2011-12 will be driven by factors such as rising crude oil prices, weakening of petrochemical margins and falling complex Singapore gross refining margins (GRM).

Like many other sectors, oil and gas companies have had some good and not-so-good factors impacting their numbers. The price of crude oil (Brent) is up eight per cent sequentially and 13 per cent year-on-year. While this will impact the earnings of upstream companies such as ONGC and Cairn, the subsidy burden of oil marketing companies will also rise substantially. Analysts say Cairn will benefit from higher crude realisations and ramp up in production from the Bhagyam fields, even as increase in oil cess may negate some of the gains.

CLSA expects under-recoveries to rise 22 per cent sequentially, but the full year adjustment to under-recovery sharing will allow IOC, BPCL and HPCL to write-back nine-month under-recoveries and report strong profits. “Based on our assumption of upstream sharing rising from 38 per cent in the nine-months to 45 per cent for 2011-12, profits for ONGC, OIL and GAIL will decline sharply quarter-on-quarter,” CLSA said.

The share of upstream companies is a matter that’s still being speculated by most brokerages as the government has not spelt it out as yet.

Morgan Stanley expects upstream to share 41 per cent of the overall subsidy burden and for the full year as compared to share of 38 per cent for the first nine months of 2011-12. Based on this, the brokerage expects the net realisation of ONGC and Oil India at $60/barrel and $63/barrel, respectively, for the full year. However, due to the higher subsidy share during the prior quarter, ONGC should earn a net realisation of $46/barrel and Oil India should earn a net realisation of $52/barrel.

Morgan Stanley expects ONGC‘s profit after tax to decline 31 per cent sequentially to Rs 3,200 crore. However, annually, profit after tax would end up 15 per cent higher. It expects Oil India to report net profit of Rs 750 crore, down 26 per cent sequentially, but up 34 per cent on a year-on-year basis.

The other two factors that would impact the earnings of oil and gas companies in the sector are thinning margins in the petrochemicals segment and weakness in the Singapore complex GRMs. Both these will impact the performance of Reliance Industries (RIL). The market is expecting further earnings downgrades for RIL, given the weakness in all its business segments.

According to CLSA, “Lower KG-D6 production, depressed refining (lower throughput) as well as petrochemical margin (down two per cent sequentially) will only be partially offset by higher other income resulting in a two per cent sequential decline in Reliance’s net profit to Rs 4,380 crore.”