ONGC: Waiting for Gas Price Revision

INDIA’S leading oil and gas producer Oil & Natural Gas Corporation (ONGC) stumped the markets with results substantially below expectations. A jump in exploration costs which proved to be unsuccessful and absence of other income led to ONGC reporting a profit of Rs 3,054 crore — well below market estimates which had pegged it at close to Rs 4, 800 crore.
ONGC’s subsidy burden was lower by 28.6% against the year ago period at Rs 3,497 crore, which helped boost net realisation to $57.7 per barrel as against $34 in the year-ago period. It were these positives that had prompted analysts to project a much higher profit number.
Although the lower subsidy burden and higher net realisations were in line with market expectations, ONGC’s writing-off Rs 2,480 crore of unsuccessful exploration expenditures was unexpected, which added 63% to its depreciation burden. It wrote off nearly Rs 660 crore on two dry wells drilled in the Konkan-Kerala offshore, around Rs 500 crore towards dry wells in KG basin and close to Rs 250 crore towards dry wells in Mumbai High. ONGC annually drills around 150-160 wells every year and writes off the expenditure if they turn out to be ‘dry’ or without any hydrocarbons.
Similarly, ONGC’s other income turned negative during the quarter from Rs 1,037 crore in the December 2008 quarter. The company converted its loan to wholly-owned subsidiary ONGC Videsh (OVL) to an interest-free loan and wrote back Rs 460 crore received as interest in first half of FY10. Reduction in overall interest rates to 6% from 11% also brought down ONGC’s other income. Going forward, the company has agreed to extend loans up to Rs 5,000 crore to its other subsidiary MRPL at discounted rates.
The scrip dipped 2% to Rs 1,140 on Thursday before the results were announced. Adjusting for the December 2009 profit numbers, ONGC’s current market price is 16 times its earnings for trailing 12 months.
Going forward, the main positive trigger for ONGC remains the revision in gas prices. ONGC is losing over Rs 2,000 crore annually on the sale of natural gas under administered prices, which could be recouped if the price increase takes place. Considering that the ONGC stock has underperformed the benchmark Sensex over the past six months, the current valuation appears fair and reasonable. Superior March 2010 quarter numbers could help the scrip gain some traction.

Reliance Industries: Analysts Divided over RIL Q3 show

WITH the benchmark gross refining margins (GRMs) touching new lows and petrochemical margins under pressure, Reliance’s (RIL) results for the quarter to December will be watched with extra interest by investors and analysts.
Although the company posted lower profits on year-on-year (yo-y) basis during the past five quarters, its profit has grown sequentially between the December 2008 quarter and September 2009 quarter. Increasing natural gas production from the KG basin proved to be the main driver.
Although the stock has not gone anywhere in the past few months, investor interest in the scrip has perked up of late as indicated by the strong uptick in traded volumes and delivery.
Over the past 15 trading sessions, the average daily traded volumes have more than doubled compared to the average for December 2009, while the percentage of delivery has risen to 39.4% from 24.8%. In fact, the average delivery volumes during 2009 averaged at just around 18% of the total traded volumes.
The analyst community remains divided on whether RIL can post a fifth consecutive sequential profit growth for the December 2009 quarter by posting profits in excess of Rs 3,852 crore recorded in the September 2009 quarter.
Vinay Nair, research analyst with Khandwala Securities, expects the company to post slightly lower numbers compared to the September 2009 quarter. “The impact of lower GRMs at around $5.2 per barrel and weaker petrochem margins is expected to be offset by rising KG basin output, estimated to average at 46 million cubic meters per day (MMSCMD),” he mentioned.
Motilal Oswal’s estimates peg RIL’s profit at Rs 4,130 crore for the December 2009 quarter. IDFC SSKI expects the profit at Rs 3,971 crore, while Sharekhan has predicted a profit of Rs 4,011 crore.
The Street expects RIL’s refining margins to be between $5 and $6 per barrel, marginally weaker compared to the $6 it reported in the September 2009 quarter due to the global weakness in the refining industry.
The December 2009 quarter saw BP’s global indicator margins dip to the lowest in 15 years, while the refining margins calculated by International Energy Agency (IEA) were in negative for most locations across the world.
Against this backdrop, the results published so far by Indian companies have been encouraging and have sparked off some optimism in the analyst community. Deepak Pareek of Angel Broking said, “Going by the higher refining margins posted by MRPL or the improved petrochemical margins of Gail, we expect RIL to post slightly better results compared to our earlier estimate of Rs 3,749 crore. We remain bullish on the scrip considering its cash accumulation that indicates some buyout.”
RIL is currently reviewing a number of global opportunities for growth, one of them being a proposed acquisition of bankrupt Netherlands based Lyondell-Basell. RIL has raised Rs 9,330 crore through sale of treasury shares in the past four months and still has nearly 30.9 crore treasury shares valued at Rs 32,500 crore.

Gail India: Maturing Valuations

GAIL India’s scrip gained 3.1% to close at Rs 438.70 as it reported a better-than-expected result for the December 2009 quarter. The company more than tripled its profits for the quarter to Rs 860 crore while it transported an additional 29% natural gas at 109 million cubic meters a day.
Although Gail couldn’t post a major growth in volume terms or at the net sales level, the reduction in its subsidy burden to Rs 455 crore from Rs 905 crore boosted the margins.
This enabled its liquid hydrocarbons business to post a robust profit of Rs 125 crore as against a loss of Rs 250 crore in the December 2008 quarter.
The other important contributor to Gail’s higher profitability was reduced E&P expenditure. The company wrote off Rs 20.2 crore in December 2009 quarter towards dry well expenditure, much lower against Rs 109.4 in the year ago period.
Staff costs also reduced against the year ago period as Gail reversed some earlier staff cost provisions. At the same time its cost of traded goods came down 11% mainly due to the reduction in imported LNG rates. LNG cargoes were being imported at a rate above $10 per million British thermal units (mBTU) in the year ago period, which averaged around $7 per mBTU during December 2009 quarter.
Being cash-rich, Gail earns a sizeable other income every quarter. The December 2009 quarter saw its other income fall 45% y-o-y as interest rates dipped and it used a part of the funds in project execution.
At the current market price, Gail is now valued at 19.5 times its profits for the trailing 12 months. It is investing heavily to lay the national gas grid and is planning to add over 6,600 km of pipelines in the next three years. Considering the long gestation period for its pipelines, the current valuations appear fair for the company.

MRPL: Weak global cues, shutdown may impact profits in Q4

MANGALORE Refinery and Petrochemicals’ (MRPL) December 2009 quarter results turned out to be better-than-expected. The company was expected to post profits over December 2008 quarter losses, but its performance over the September 2009 quarter is what has surprised the market, given the weak refining environment. MRPL reported a net profit of Rs 259.5 crore in December 2009 quarter compared to a loss of Rs 285 crore in December 2008 quarter.
Higher inventory gains, processing of low-cost Cairn crude oil and improved capacity utilisation proved to be the main factors contributing to higher gross refining margins (GRM), while forex gains added to the bottomline. With oil prices steadily moving up, MRPL made an inventory gain of $2.53 per barrel in December 2009 quarter, higher than in September 2009 quarter. The inventory valuations had crashed in December 2008 quarter along with oil prices leading to loss of $14.4 per barrel. The GRM for December 2009 at $4.51 per barrel was higher than $3.59 of September.
The company also processed Cairn’s Rajasthan crude oil for the first time during the quarter, which came in at a 10-15% discount to benchmark Brent prices. Although the share of Rajasthan crude was around 3% in the 3.4 million tonne of crude oil processed during the quarter, it helped boost margins.
In an otherwise weak economic environment, the company also raised its capacity utilisation to improve profits. As a result, the sales volumes during the quarter moved up 11.7% against the year ago period to 3.28 million tonne.
With the rupee appreciating during the quarter, MRPL booked a gain of Rs 153.1 crore as against a loss of Rs 78.8 crore in the corresponding quarter of last year.
In a weak market, the MRPL scrip shed 3.1% to Rs 86.25 before the results were announced. Factoring in for the December 2009 quarter earnings, the scrip is now trading at a price-to-earnings multiple of 10.3.
The persistent weakness in the global refinery industry and the company’s planned 35-day shutdown in the fourth quarter of FY10 will impact MRPL’s profits, going forward. As a result, the upside from current levels appear limited in the short run.

Oil majors may score well in Q3

But It Will Be A Tough Ride Ahead As Concerns Over Global Recovery Remain

SEVERAL Indian petroleum companies are expected to post healthy growth numbers when they publish their December 2009 quarter results in the next couple of weeks. On the face of it, the growth numbers for the December 2009 quarter may appear encouraging for investors, however, they must bear in mind that this growth is posted on a low base. Most companies had suffered heavily in the December 2008 quarter due to a crash in oil prices.

UPSTREAM
The profitability of ONGC will jump markedly in December 2009 quarter mainly as its subsidy burden declines. ONGC contributed Rs 4,899 crore as subsidy in December 2008 quarter and reported net realisations were just $25 per barrel of oil sold to oil marketing companies. In the current quarter, its subsidy burden is expected to decline to Rs 3,600 crore, which will improve its realisation above $55 per barrel. Brokerage estimates peg ONGC’s profit jump between 75% and 105% against the year ago period. Cairn will report its first production numbers from Rajasthan field during the third quarter. Cairn sold its first cargo of crude oil from Rajasthan fields in the first week of October 2009 and is estimated to have sold a total 1.25 million barrels of oil during the December 2009 quarter. However, with the start of commercial operations, interest and depreciation costs will dent its profitability. Brokerage estimates vary widely for the company, estimating a profit fall between 3% and 75% against the corresponding quarter last year.

MID-STREAM
The standalone refiners such as Mangalore Refinery and Chennai Petroleum will post modest profits in the December 2009 quarter compared to the net losses in the year ago period. However, the weaker industry outlook means their profits will be lower on a sequential basis compared to the September 2009 quarter. Private sector refiners RIL and Essar Oil too will face the pressure on their gross refining margins. However, RIL will post some profit growth, thanks to doubled volumes from additional refinery and increasing gas volumes from KG basin. According to various brokerages, RIL will post GRMs between $5 and $5.6 per barrel and profit for December quarter will be higher by 13-19% on a y-o-y basis.

DOWNSTREAM
The fate of public sector oil marketing companies (OMCs) — Indian Oil, BPCL and HPCL — will clearly depend on whether the government compensates them fully for their under-recoveries. These companies have not received any government support for the first half of FY10. Latest media reports suggest that the finance ministry is willing to make good only one-third of the estimated under-recoveries of these three oil majors for FY10 so far. This will leave the oil companies to absorb a large chunk of losses for the whole year.
The global business outlook for the petroleum industry is expected to remain subdued for the months to come. While the refining players will face margin pressure, the crude oil prices too run a downside risk if the built-in growth expectations don’t fructify.
For Indian players, the long overdue recommendations by the KG Parikh Committee remain the foremost positive factor. Any liberalisation in the industry could bring down the under-recovery problem for the PSU players, while the private players could find themselves on a level playing field in the retail business. Besides, the proposed gas price hike will bid well for ONGC while the success of LyondellBasell deal could bring in more positives for RIL.

RALLIS INDIA: Dahej unit to propel Rallis’ future earnings

TATA Group firm and agrochemicals manufacturer Rallis India came out with strong profit growth numbers, when it unveiled its results for the quarter to December 2009. The profit growth was on expected lines considering the improved industry outlook in India and the company’s initiatives at innovating, optimising costs and expanding capacities despite a sluggish exports market. The main feature of the results is the strong improvement in the company’s operating margins to 20.7% from 14% in the year ago period. This enabled the company to post a jump of nearly 50% at the PBDIT level notwithstanding a dip in net sales. Better product portfolio and working capital management helped the company in improving margins. The company’s interest cost remained insignificant, while depreciation charge slipped marginally. The resultant pre-tax profit was 57.8% higher against the December ‘08 quarter numbers. Taking into account the extraordinary items and tax, net profit rose 54.5% to Rs 24.1 crore. Rallis is investing Rs 150 crore in setting up a new plant in Dahej scheduled to be commissioned by July 2010. This plant with an annual capacity of 5,000 tonne is expected to generate cumulative revenues of over Rs 500 crore in its first three years of operations.
The company also continues to introduce new products at regular intervals and had launched Ergon, a product developed through in-house R&D. Recently, Rallis has become a subsidiary of Tata Chemicals, which bought out the stakes of other promoter group companies. Further 9.8 lakh shares were allotted to Tata Chemicals on a preferential basis during the quarter, taking the Tata Chemicals ownership in the company to 50.2%.
Coming as it is after a poor kharif season hit by erratic monsoon, the rabi season appears better compared with the yearago period, mainly due to higher cultivation acreage. Overall, the agrochemicals industry is going through an excellent phase at present, with farmers enjoying a better liquidity. The Rallis scrip, which has more than tripled from the year-ago level, gained 0.9% to close at Rs 1,061 on BSE before the results were announced. The current valuation at a price-toearnings multiple of 15.5 appears to have fairly discounted the December ‘09 quarter numbers. While the company is expected to post better numbers even for the March 2010 quarter, the improved domestic business outlook and its upcoming unit in Dahej will propel future earnings growth.

SINTEX: Acquisition Synergies Help Dec 09 Numbers

BETTER synergies generated after the acquisition of subsidiaries helped Sintex show a flat consolidated performance during the quarter to December ‘09, although on a standalone basis, its performance was weak.
The company’s profits for the quarter dipped 11.3% on a standalone basis to Rs 55.9 crore, but the consolidated numbers at Rs 72.8 crore were 1.5% higher compared with the year-ago period.
Sintex had acquired six companies over the past couple of years – two in the US, one in France and three in India. The overseas subsidiaries had been hit hard by the economic turmoil over the past 18 months, but have now started looking up. However, following the company’s failed attempt at acquiring Geiger Tech in Germany, which filed for bankruptcy, Sintex is likely to write off its initial investment of E7 million (approx Rs 46 crore) during the current financial year. For the December quarter, the company reported a 3.4% growth in consolidated net sales to Rs 848 crore. However, rising raw material costs impacted its operating margin leading to a situation where its PBDIT is now below the year ago level. The company shaved off close to one-thirds of its interest costs by replacing high cost loans, which helped its pre-tax profit inch up 3.5% to Rs 98.8 crore.
Its textiles business grossly underperformed during the quarter with a 6% dip in sales and 67% fall in profits. In comparison, the plastics segment performed well with a double-digit profit growth against the year-ago period.
Sintex Industries’ December 2009 quarter financial performance failed to impress investors, as its shares dipped 0.8% to close at Rs 269 on BSE. The scrip, which has underperformed the Sensex during the past year, is now being valued at 12 times its consolidated earnings for the past 12 months. The company reported improving capacity utilisation rates across businesses, which can help boost higher revenues, going forward. With over one-thirds of its annual profits typically generated in the last quarter, the March 2010 quarter numbers could be substantially better.
The company is also carrying a war chest of around Rs 1200 crore of cash, initially raised to fund an acquisition, which could add an unexpected boost to growth.