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Oil & Gas: Q4FY18 preview - Strong operational performance in store for Q4

Marketing/distribution companies – Very strong EBITDA growth

Oil Marketing companies (OMC) are expected to post strong Q4FY18E operating earnings yoy, supported by robust refining margins and steady marketing margins. However, qoq earnings present a mixed trend. A sharp recovery in marketing margins offset by lower core GRMs and lower inventory gains versus Q3 are likely reasons for our expectation of a weak refining performance qoq. We estimate IOCL/BPCL/HPCL to report GRMs of US$7.9/6.9/7.7 per bbl, respectively, for Q4 versus US$9/6/8 per bbl in Q4FY17. The yoy improvement in margins is driven by Singapore GRMs expanding by US$0.6/bbl yoy, offset by lower inventory gains. Gross margins for petrol/diesel have expanded back to Rs3/ltr in Q4 post the decline to Rs1.8/ltr in Q3FY18. We thus expect blended marketing margins of Rs4,275/Rs4,474/Rs4,900 per ton for IOCL/BPCL/HPCL, respectively, to increase by Rs900-Rs1,000/t for the three companies. Overall, we estimate 74% yoy growth in EBITDA for OMCs versus 16% dip qoq.

City gas distribution (CGD) companies should post strong volume growth and robust margins during the quarter with yoy growth for Q4FY18 likely to be much higher than Q3. GGL saw a relatively weaker performance in Q3, which spoiled the stronger performance of IGL/MGL and we see GGL’s performance reversing in Q4. We estimate 5%/12% yoy volume growth for MGL and IGL, respectively, led by continued strength in Dom/CNG and commercial/industrial volumes, with margins aided by softer LNG prices. GGL has also seen significant traction in Morbi volumes, which we believe is responsible for the recovery in volumes to 9-quarter high of ~6.4 mmscmd coupled with qoq improvement in margins as well. Resultant, CGD’s EBITDA/net earnings is estimated to post 44%/53% yoy growth for the quarter.  

Refining – Lower benchmark margins weigh on GRMs

The US$0.2/bbl qoq dip in benchmark Singapore GRMs, coupled with weaker product spreads in Gasoline (Exhibit 12) along with lower inventory gains offset the strength in diesel spreads (Exhibit 14) during the quarter. We expect core margins of both CPCL and MRPL to dip US$0.5-0.6/bbl, with reported GRMs of US$7.3/7.1 dipping US$1.2/bbl qoq.   

We expect RIL’s (an integrated player) GRMs to decline US$0.4/bbl qoq (US$11.2/bbl in Q4FY18E; US$11.6/bbl in Q3FY18), which implies a premium of US$4.2 /bbl to Asian benchmarks. Our estimate of refining throughput at 17.6mt is lower qoq due to lower throughput in Feb-Mar 2018. However, we expect higher petchem earnings qoq (EBIT up 84/10% yoy/qoq to Rs63.3bn) led by: i) higher spreads in both polymer and polyester chains and ii) higher volumes. We estimate RIL’s Q4FY18E (consol) earnings at Rs92.8bn, up 15% yoy, along with the company’s stellar performance in the telecom segment.    

Upstream – A strong quarter on improvement in net realisation

Upstream companies should see a strong quarter, with high oil realisations (average Brent Crude prices up ~US$5/bbl qoq, US$13.4/bbl yoy) that we believe would drive strong earnings, while production of ONGC/OIL would also grow 1-3% yoy. ONGC is expected to post 2% growth in oil but a stronger ~6% yoy growth in gas output coupled with higher oil realisations (up 19/8% yoy/qoq) should drive 26%/5% yoy/qoq growth in EBITDA, respectively. OIL would show 3%/4% yoy growth in oil/gas volumes and 22%/8% yoy/qoq growth in realisations, which will drive 75% yoy/5% qoq growth in EBITDA.

Robust utilisation/tariff hike helps PLNG; GAIL/GSPL to likely report strong Q4

A combination of higher utilization (driven by expanded capacity and Gorgon volume flowing to Dahej) and higher margins (driven by the annual 5% tariff hike taken in Jan 2018) are likely to significantly impact Petronet LNG’s (PLNG) Q4FY18E earnings versus Q3FY18. We estimate ~112% utilization in PLNG at 4.2mt volumes. We thus expect earnings to improve 17% yoy and 4% qoq, driven by higher volumes and higher margin assumptions for the quarter.

Higher gas transmission volumes and stronger HDPE prices will help offset 11% qoq reduction in Asian LPG prices. In addition, strong petchem volumes and margins would help GAIL India report strong earnings. We expect GAIL to post earnings of Rs13.9bn, up 32% yoy and 1% qoq. Similarly, stronger demand from RIL due to delay in commissioning of the petcoke gasifier and power demand due to thermal coal supply constraints will drive 11 mmscmd yoy rise in GSPL’s transmission volumes, aiding 44% yoy earnings growth.

We have tweaked FY18E estimates to factor Q4FY18 changes (Exhibit 2). Our preferred picks remain unchanged, with HPCL, GAIL, Gujarat Gas, IGL and ONGC the top picks in the sector.