Faster Govt Decisions a Positive for Cairn

Cairn India’s results for the March 2013 quarter must have come as a relief to investors worried about the stock’s recent lacklustre show. The company’s production has been stagnant, but it is working on plans to scale it up gradually. Faster government decisions in the E&P space is a key positive for the company. Cairn India’s production rate in the last quarter of the previous fiscal was 1,26,623 barrels of oil equivalent per day (boepd), 1.1% lower quarter on quarter. This was mainly due to an early onset of natural decline at its key Mangala field. This is what spooked the markets, leading to the stock’s underperformance so far in 2013; Cairn’s scrip has fallen over 8% against the BSE Sensex’s fall of just about 1.5%.

These worries have been priced into the stock. The company’s plans for other fields are likely to make up for the dwindling production at Mangala, even as it seeks government nod for its enhanced oil recovery programme’s field development plan (FDP). The company has also commenced natural gas sales, which could go up in future.
The company’s second-biggest field, Bhagyam, will achieve its peak production of 40,000 barrel per day (bopd) in the second half of FY14 from over 20,000 bopd at present, while the smaller Aishwarya field will reach a milestone of 10,000 barrels daily in the first half. Similarly, the company expects to commence production from the Barmer Hill formation this year subject to timely approvals. The company also plans to drill 450 more wells for exploration, appraisal and development purpose over the next three years to support production volumes.
“We expect to exit FY14 with a production rate of 2,00,000 - 2,15,000 bopd at the Rajasthan block, against the current production of 1,75,000 bopd,” said P Elango, interim CEO and wholetime director, Cairn India, during a media conference call after the results. This means the company should be able to maintain or marginally improve its production in FY14 compared with FY13. Also, there is a potential upside available from incremental exploration in the Rajasthan block or the gas discoveries in its Sri Lankan block. Elango said the company is set to get a better price for its crude oil in FY14, which is sold at a discount to the widely followed Brent benchmark in accordance with its quality. “As against the 10-15% discount to Brent crude oil prices till now, we are revising our guidance to 8-13% discount,” he said. The stock’s under-performance has pulled down the company’s valuation — now at a P/E of 4.6 — to the lowest among peers. Faster government decisions in the exploration and production segment, the company’s track record in project implementation and its potential for growth should assuage investors’ worries.

Slowly Walks the Giant

Refining, Petrochem Boost to Help RIL Maintain Profitability

The earnings report card of Reliance Industries is expected to be good as the company is expected to maintain its profitability from the Oct-Dec 2012 quarter when it announces its numbers for the fourth quarter of FY13 on Tuesday on the back of a better show by both its refining and petrochemical divisions despite a drop in output from the Krishna Godavari basin.
RIL had posted a net profit of . 5,502 crore — its third highest quarterly net profit figure — in the quarter to December 2012. In the subsequent three months, gross refining margins — or the differential between sale proceeds of petroleum products and the cost of crude oil needed to produce them — has improved marginally.
While Q4FY13 started strongly with GRMs above $10, the end of the quarter has seen GRMs of $5 per barrel; averaging $8.5 per barrel overall for Q4FY13. RIL should benefit from the QoQ stronger GRMs,” a preview report by Elara Securities says. Most analysts expect the company to report GRMs in the range of $9.85-$10.1 for the quarter, higher than the $9.6 it posted in the December 2012 quarter. The company may, however, post a fall in volumes, as its refinery was partially shut down for maintenance. Similarly, the petrochemicals division is set to post a superior performance with most petrochemicals and polymers commanding better prices, while the naphtha prices stagnated. “Asian chemical spreads have surged on account of maintenance shutdown at some units. Polymer cracks have expanded, too – polypropylene cracks lead with a 29% QoQ expansion, followed by polyethylene cracks at a 15% QoQ increase,” says an earnings preview note from ICICI Securities. RIL’s petrochem business could surprise on the higher side, as demand has improved QoQ, it says.
Street estimates for petrochemical margins fall in the range of 9-9.5% for the March 2013 quarter up from 8.8% of the December 2012 quarter.
The company’s oil and gas division is expected to post a faster drop in revenues and profits led by a drop in the KG basin natural gas output. During the last quarter, RIL’s KG basin natural gas output had averaged 24.3 mmscmd, which is expected to drop to somewhere between 19 and 20.6 mmscmd in March 2013 quarter.
As a result, most analysts believe the company will maintain its profit level from the preceding quarter with most aggressive estimates predicting a growth of close to 1.5%, while most conservative estimates peg a drop of close to 4%. When compared to the yearago numbers, the company should be able to maintain a high double-digit growth rate thanks to the low base. RIL’s investors should cheer if it is able to surpass its own previous performance. 

Cooling Global Prices Augur Well

Crude Oil Prices

Global crude oil prices have started cooling off, which is good news for India, whose imports of crude oil topped $129 during the first 11 months of FY13. Over the last six to seven weeks, India’s cost of imported crude oil has fallen over 10%, which along with subsidy reduction measures taken earlier could mean a lower bill for selling fuel below cost in FY14 compared to a year ago.
India’s cost of imports which were over 6,200 per barrel in February 2013
    has since eased substantially to
    5,600 or close to those levels in
    early April. This was mainly due to a fall in global crude oil prices, while the rupee remained weak. Globally, oil prices are sliding because of a seasonal weakness in demand, a weak economic outlook for 2013 and improving production outlook of non-OPEC countries.
For an import-dependent economy like India, the benefits are substantial. Starting April, the subsidy on diesel fell to 6.52 per litre – the lowest in atleast 18 months. The bill for selling fuels below cost by India’s state-owned oil companies are projected to top 162,000 crore in FY13 with 60% of that on account of low pricing of diesel. Therefore, cutting losses on this key fuel hints at the prospect of a lower fiscal burden down the line. It will also help marginally ease the current account defi cit.

Oil Cos to Put Up a Mixed Show

he results of India’s listed petroleum companies in the fourth quarter, or the quarter to March, are likely to be mixed as it marks the end of a fiscal with record subsidies. The external environment remains healthy for the industry and FY14 could be agood year with a number of positive policy decisions in the offing.
The benchmark Brent crude oil prices averaged $114 per barrel during the quarter, 2% higher sequentially, but lower from a year ago. The petroleum industry’s underrecovery for the quarter is estimated to be between Rs 36,000 crore and . 37,300 crore, lower than the Rs 39,268 crore in the October to December, 2012 quarter.
Despite a sequential fall in under-recovery — selling products below cost — the burden of upstream state-owned companies such as ONGC, Oil India and Gail could rise as the government attempts to fully compensate downstream oil marketing companies Indian Oil, BPCL and HPCL. In the first nine months of FY13, these upstream companies had shouldered over 36.2% of the under-recovery burden, which is expected to rise to 38% to 40% for the full fiscal, calling for a largerthan-proportionate rise in their burdens. The downstream oil market companies, however, won’t have much to cheer about as they close the year with profits in line with the last few years. The actual cash support from the government will take time, keeping their debt burdens high. Standalone refiners such as Reliance Industries and Essar Oil are expected to benefit from the sequential improvement in the gross refining margins, or GRMs. Reuters Singapore GRM rose 37% QoQ to an average $8.7 per barrel in the last quarter of FY13 against $6.5 in the third quarter, according to a report by Motilal Oswal.
Even petrochemical margins have maintained healthy levels on a sequential basis. Higher raw material (naphtha) costs and a mild pull from re-stocking demand post the Chinese lunar holiday helped improve petrochemical margins in Q4. Polymer prices and margins improved across the board and would be earnings accretive for RIL, GAIL and IOC during the quarter, a Religare Institutional Research report said. However, RIL could see some volume drop on partial closure of its refinery during the quarter. For natural gas transporters, the draught season is expected to continue even in the last quarter of FY13 as volumes fail to move up.
In its report, Kotak Securities said the natural gas supply in India was lower (during the March quarter) due to a delay in ramp-up of the natural gas production from KG-D6 by RIL. This will not only negatively impact the performance of RIL but also impact gas-utility companies such as GSPL, GAIL and Gujarat Gas, it said. However, part of the gas volume loss was compensated by higher import of LNG by PLNG, it said.
As FY14 unfolds, global crude oil prices are expected to remain under pressure due to a subdued economic growth outlook and healthy supply growth. This, apart from refinery closures, is expected to support refining margins. The declining diesel subsidy and a possible increase in the price of natural gas will be good for upstream public sector companies.

Fall in Bulk Diesel Buy Cools Oil Demand

Oil consumption is likely to remain sluggish after contracting in February, the first drop in two years, mainly due to a fall in purchases by bulk diesel buyers, report Rajeev Jayaswal & Ramkrishna Kashelkar.

High Price may Curb Oil Demand

Consumption contracts in February amid economic slowdown and a drastic fall in purchases by bulk diesel buyers

    India’s oil consumption is expected to remain sluggish after contracting in February, the first drop in nearly two years, because of higher prices, economic slowdown and drastic fall in purchases by bulk diesel buyers who have been charged market rates since January. Diesel sales, which account for more than half of oil products sold in India, dropped 2% in February compared to a year ago, going in reverse gear after galloping for four years. Lower automobile sales and slowdown in aviation also contributed to the slack demand. Analysts said that while falling oil demand reflected a weak economy, it would also reduce the subsidy bill, and higher prices will encourage energy efficiency.
“The total consumption for the month of February, 2013 has been the lowest and first time negative, in the last 23 months,” Government’s data-keeper Petroleum Planning & Analysis Cell (PPAC) said in its latest report.
India’s economic growth in 2012-13 is expected around 5% but the growth in the third quarter was only 4.5%, the lowest in a decade. “There are no immediate signs of faster growth in near terms, hence, consumption growth of petroleum products are expected to remain low for quite sometime,” one official said requesting anonymity. In the third quarter, the country’s economic growth was slow because of slump in farm, mining and manufacturing output. While Feburary sales drop compares with a 29-day month in 2012, a leap year, analysts said the demand was shrinking. “Rising domestic prices and slowing down economic activity are putting pressure on domestic petroleum consumption. A reduction in petroleum consumption is good for the economy since it reduces the fuel subsidies as well as improves current account deficit,” said Debasish Mishra, senior director at Deloitte Touche Tohmatsu India. Arvind Mahajan, head of energy & resources, KPMG in India said there were multiple factors behind the fall in demand. “While it is true the economic growth rate is slowing down, a part of the demand is also impacted due to rising prices and the need to conserve.
In a way this is good because ultimately it will improve focus on efficiency in the long term and improve the domestic current account deficit apart from lowering the fuel subsidies,” said Arvind Mahajan, head of energy & resources, KPMG in India. "One needs to watch if this translates in a consistent trend. But one thing is for sure that there is a slowdown in domestic consumption," he added According to oil industry officials, bulk diesel sale had dropped by about 40% in February and the trend would continue. Bulk diesel, which accounted for 18% of India’s 70 million tonnes annual diesel consumption, saw a drastic fall within a month after the government changed its pricing system. The price of diesel for consumers buying directly from oil marketing companies was raised to market levels in January.
“Most of the bulk consumers have cut down their inventories due to wide price difference between bulk and retail diesel. The high cost of diesel has forced many consumers to generate power using furnace oil,” an executive of Indian Oil Corp said. Bulk diesel was about Rs 11 per litre costlier than the fuel sold to retail consumers in February. The gap has, however, narrowed to about . 6.50 per litre in April because of drop in international oil prices.
Port traffic, which is one of the indicators of economic growth, also remained negative in February because of slowing of exports and ban on mining and the situation would not improve immediately, industry executives said. Shipping industry is one of the major consumers of diesel. Of the 12 major ports in the country five have recorded negative growth in port traffic led by Marmugao (-52.6%), Vishakhapatnam (-13.3%), and Kolkata (-10.1%). 
The report says that petrol consumption did see 4.2 % growth in February but slowdown in sales of passenger vehicles could pull down its consumption in near future. Total passenger vehicles sales in February -16.1% growth.
“The price of diesel, which represents nearly 45% of overall domestic consumption, has increased considerably in last few months. Similarly, petrol prices have increased, while reduction in airline capacity has reduced ATF consumption. Industrial consumption, transportation requirements are falling due to the slowing economy. Thus there is overall pressure on petroleum demand,” mentioned Rahul Prithiani, Director, CRISIL Research. “The consumption growth will remain subdued if things don’t improve in FY14,” he added.