low-base effect; better days ahead

Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset Edelweiss Securities Limited

Low-base effect; better days ahead

We estimate the O&G sector’s aggregate EBITDA would rise by 3.7x YoY (low base given OMCs'/ONGC’s inventory write-off in Q4FY20) and 11.6% QoQ in Q4FY21 driven by modestly recovering demand. OMCs (IOCL, BPCL, HPCL) are likely to be outliers with 6.2% QoQ EBITDA growth owing to large inventory gains and steady marketing margins.

We estimate RIL’s consolidated EBITDA would rise 9.6% YoY, led by very strong petchem margins in O2C and an EBITDA uptick of 35% YoY in retail due to higher footfall. A 20% YoY surge in oil prices and modest oil/ gas production would power up ONGC’s EBITDA by 1.8x YoY (lower base YoY). EBITDA of city gas distribution companies should surge 40% YoY due to strong margins and QoQ volume recovery.

CGDs QoQ volume likely to rise; GAIL to clock high petchem margin

We estimate IGL’s EBITDA would increase to INR8.71/scm (up 26% YoY) driven by a

CNG price hike in Q4 and the recovery in volumes to pre-covid level, taking the total

volumes to 6.58mmscmd (+10% YoY). Margins of GGL/MGL are likely to remain

robust YoY as well; QoQ recovery in volume demand should somewhat offset the

impact of high LNG prices during the first half of Q4. GAIL’s EBITDA is estimated to

rise 30% QoQ (flat YoY) primarily due to very high petchem margins and a spike in

trading margins, which was led by high spot LNG prices (~2.6x YoY). While PLNG is

likely to clock better volumes, which would fuel EBITDA by 79% YoY (low base effect

in Q4FY20 due to high opex), GSPL’s EBITDA would take a hit of -12.5% YoY on the

back of muted volume demand amid high spot LNG prices.

RIL: O2C and retail likely to recover, but not yet on track

We estimate RIL’s consolidated EBITDA would surge by 9.6% YoY/ 10.6% QoQ led

by strong petchem margins on the back of a modest refining performance, strong

retail (up 35% YoY) led by higher footfalls, and a 37.7% YoY increase in RJio as the

RJio subscribers base would increase to 419mn (from 411mn currently) and ARPU

would decrease to INR139. We estimate GRMs to increase led by better diesel and

gasoline cracks.

Sub Head

FP Table Body

OMCs: Modest marketing margins with high inventory gains

We estimate GRMs (including inventory gains) to increase to USD3.5/4.0/2.5 per

bbl for IOCL/BPCL/HPCL driven in the wake of the increase in oil prices and improved

demand across the slate. These companies should report high inventory gains in

Q4FY21 due to rising oil prices. At the same time, higher petrol/ diesel retail prices

would enhance marketing margins, which is likely to benefit HPCL the most given

its higher exposure to the segment. Outlook: Positive for gas. Top picks: IGL, Gujarat

Gas and MGL

India Equity Research Oil & Gas April 8, 2021

Oil & Gas SECTOR UPDATE

Jal Irani Shubham Mittal +91 (22) 6620 3087 +91 (22) 4063 5459 [email protected] [email protected]

Oil & Gas

Edelweiss Securities Limited

2 Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset

Sub-sectors’ aggregate EBITDA growth in Q4FY21

EBIDTA growth (%)

YoY QoQ

OMC's (HP, BP, IOCL)-Reported NA 6.2

OMC's (HP, BP, IOCL)-Core (24.9) 10.2

City Gas (IGL, MGL, GGL) 39.8 2.3

Gas transmission (GAIL, GSPL) (0.8) 21.1

Gas utility (PLNG) 79.0 (6.5)

Reliance Industries (Reported) 9.6 10.6

Reliance Industries (Core) (8.5) 10.6

ONGC (Reported) NA 26.9

ONGC (Core) 23.3 26.9

Aggregate (Core) (6.3) 13.2

Source: Edelweiss Research

Q4FY21E industry assumptions

Q4FY21E Q3FY21 Q4FY20

Brent ($/bbl) 61.3 45.3 50.8

USD/INR 72.9 73.8 72.4

Singapore GRM ($/bbl) 1.8 1.2 1.2

OMC's Marketing margins (INR/ltr) 4.0 4.2 4.5

OMC's Oil Product Sales (MMT) 40.3 40.8 39.1

ONGC Gas Production (BCM) 5.9 5.8 6.0

ONGC Oil Production (MMT) 5.7 5.6 5.8

PLNG Dahej Utilisation 95.0% 97.9% 90.8%

Source: Edelweiss Research, Company

Q4FY21E industry assumptions

QoQ% YoY%

Brent ($/bbl) 35.5 20.7

USD/INR (1.2) 0.7

Singapore GRM ($/bbl) 45.1 50.7

OMC's Marketing margins (INR/ltr) (4.7) (12.4)

Oil Product Sales (MMT) (1.1) 3.0

Gas Production (BCM) 2.2 (1.7)

Oil Production (MMT) 0.4 (2.8)

PLNG Dahej Utilisation (2.9) 4.6



Q4FY21 preview

Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset 3

Q4FY21 industry estimates


Stock Q4FY21E Q4FY20 Y-o-Y Q3FY21 Q-o-Q Comments / Key highlights

(INR mn) (INR mn) (%) (INR mn) (%)

Revenues 14,08,360 13,62,400 3.4 11,78,600 19.5

Reported EBITDA 2,38,626 2,17,820 9.6 2,15,660 10.6

Core EBITDA 2,38,626 2,60,820 (8.5) 2,15,660 10.6

Reported PAT 1,33,340 63,480 110.1 1,32,220 0.8

Core PAT 1,33,340 1,06,480 25.2 1,32,220 0.8

Revenues 8,49,799 6,89,914 23.2 6,67,313 27.3

Reported EBITDA 44,695 -16,996 NA 43,057 3.8

Core EBITDA 28,317 44,134 (35.8) 34,587 (18.1)

Reported PAT 28,944 -13,610 NA 27,776 4.2

Core PAT 12,566 47,520 (73.6) 19,306 (34.9)

Revenues 9,42,456 6,61,549 42.5 6,86,592 37.3

Reported EBITDA 37,557 -17,095 NA 33,015 13.8

Core EBITDA 23,672 33,785 (29.9) 16,815 40.8

Reported PAT 25,918 268 NA 23,546 10.1

Core PAT 12,033 51,148 (76.5) 7,346 63.8

Revenues 13,76,543 11,84,391 16.2 10,63,365 29.5

Reported EBITDA 1,00,779 -1,10,925 NA 96,219 4.7

Core EBITDA 77,682 94,757 (18.0) 66,219 17.3

Reported PAT 55,187 -51,853 NA 49,166 12.2

Core PAT 32,090 1,53,829 (79.1) 19,166 67.4

Indraprastha Gas Revenues 15,782 15,525 1.7 14,462 9.1

EBITDA 5,160 3,767 37.0 5,007 3.1

Core PAT 3,464 2,534 36.7 3,349 3.4

Mahanagar Gas Revenues 7,174 6,866 4.5 6,664 7.7

EBITDA 3,273 2,438 34.2 3,167 3.3

Core PAT 2,253 1,666 35.3 2,172 3.7

Gujarat Gas Revenues 31,851 26,666 19.4 28,294 12.6

EBITDA 6,212 4,267 45.6 6,148 1.0

Core PAT 3,904 2,459 58.8 3,922 (0.4)

We expect sequentially flat EBITDA on high LNG spot

prices offset by some volume gains in Morbi region and

pharma belt. This should translate into EBITDA margin

of INR5.88/scm (flat QoQ, +24% YoY).

Indian Oil

We build in 4.7% QoQ rise in Reported EBITDA on

anticiapted high inventory gains. We expect Reported

GRM to be aorund USD3.5/bbl due to a rise in cracks

across distil lates. Modest core marketing margins with

improved sales volumes amid covid-19 lockdown is

expected to improve marketing EBITDA. Petchem EBITDA

is l ikely to rise on commissioning of PP capacity at

Paradip and higher margins.

We anticiapte 10% YoY volume gorwth. Commercial

volumes is expected to remain low in comparison with

CNG and PNG volumes, which are back to pre covid level

and even more then that levels. EBITDA margins is l ikely

to im prove on higher oeprating leverage.

We expect 5.7% YoY volume growth led by higher CNG

and PNG volumes in Mumbai and Pune regions. PNG

volumes is l ikely to fare better than CNG volume on

higher industrial and domestic demand. EBITDA

margins is l ikely to improve on higher oeprating

leverage.

RIL

We expect modest O2C EBITDA (-3.8% YoY, +23.8% QoQ),

strong retail EBITDA of +35% YoY and modest telecom

EBITDA of +37.7% YoY(on low base), leading to a +9.6%

YoY (+10.6% QoQ) increase in consolidated EBITDA.

GRM is l ikely to increase led by strong cracks across

distil lates. Petchem margin has surged YoY due to

higher polyster and polymer spreads and with moderate

demand leads to increase in petchem EBITDA. Jio EBITDA

is l ikely to increase driven by subscriber additions to

419mn while retail EBITDA increase will l ikely be driven

by higher footfall.

BPCL

BPCL's EBITDA is expected to improve by over 3.8% QoQ

(lower base in Q4FY20 due to inventory write off) on the

back improving GRMs (forecast USD 4/bbl in Q4FY21E).

Reported GRM implies a USD2.2/bbl premium to

benchmark as BPCL's HSFO output is significantly lower.

Core marketing margins is expected to remain modest

YoY, with modest marketing sales

HPCL

HPCL EBITDA is l ikely to increase 14% QoQ (lower base

in Q4FY20 due to inventpry write off) due to high

invenotry gains and better refining margins than Q3.

We expect reported GRM at USD 2.5/bbl. Modest core

marketing margins with improved marketing sales

volume is l ikely to improve marketing EBITDA. We

expect high inventory gains in Q4.

Oil & Gas



Q4FY21 industry estimates (Contd.)


Production likely to remain muted

We estimate ONGC’s oil/gas production would decline 1.7%/2.8% YoY to

5.7MMT/5.9bcm in Q4FY21 (versus 5.8MMT/6bcm YoY).

ONGC’s gas production to continue to contract in Q4FY21E


Stock Q4FY21E Q4FY20 Y-o-Y Q3FY21 Q-o-Q Comments / Key highlights

(INR mn) (INR mn) (%) (INR mn) (%)

GAIL Revenues 1,66,652 1,77,531 (6.1) 1,54,543 7.8

EBITDA 24,961 24,754 0.8 19,195 30.0

Core PAT 18,768 30,182 (37.8) 14,873 26.2

GSPL Revenues 4,925 5,950 (17.2) 5,800 (15.1)

EBITDA 3,114 3,557 (12.5) 3,984 (21.8)

Core PAT 1,862 2,256 (17.5) 2,475 (24.8)

Petronet LNG Revenues 94,797 85,672 10.7 73,282 29.4

EBITDA 12,486 6,975 79.0 13,353 (6.5)

Core PAT 8,087 3,590 125.2 8,785 (7.9)

ONGC Revenues 2,26,785 2,14,562 5.7 1,70,238 33.2

Reported

EBITDAX1,05,903 36,889 NA 83,461 26.9

Reported

EBITDAX1,05,903 85,879 23.3 83,461 26.9

Reported PAT 28,173 -30,980 NA 13,782 NA

Reported PAT 28,173 18,010 56.4 13,782 NA

We expect GAIL's EBITDA to remain robust QoQ (low

base in Q4FY20 due to deferred tax adjustment) led by

strong petchem margins and better LPG/liquid

hydrocarbons business. Transmission EBITDA is l ikely

to improve 8.4% YoY due to more demand led by work

from home culture. Trading margins is expected to

remain strong with high spot LNG prices. LPG EBITDA is

also expected to increase sequentially QoQ due to

increased LPG cylinder demand and better pricing of oil-

l inked LPG.

GSPL is l ikely to see a muted volume demand at

34.5mmsmd, which is a decrease of 6.2% YoY due to an

uptick in spot LNG prices. We expect EBITDA to decrease

by 12.5% YoY, with opex/scm rising QoQ due to costs

incurred for network expansion.

PLNG EBITDA is expected to surge 79% YoY (low base in

Q4FY20 due to very high opex) ledy by improved

volumes along with steady tariff. As the lockdown is

getting phase wise lifted, we expect volume growth to

increase by 4% YoY with higher util isation at Kochi and

capacity expansion at Dahej.

Higher crude prices (20% YoY), gas production (-1.7%

YoY) and gas prices (-25% YoY) is l ikely to increase

revenue by 5.7% YoY. Oil production, however, should

increase in FY22 after several quarters of decline. We

expect EBITDAX to increase ~2x YoY (low base in Q4FY20

due to invenotry write off ) led by higher higher oil

realizations.

-15.0

-9.0

-3.0

3.0

9.0

15.0

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5.4

5.8

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6.6

7.0

Q3

FY1

6Q

4FY

16

Q1

FY1

7Q

2FY

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E

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chan

ge %

Pro

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MM

T/ B

CM

)

Oil Production Gas Production #REF!

Gas Y-o-Y change Oil Y-o-Y change


Q4FY21 preview


Singapore benchmark GRMs have recovered to USD1.8/bbl

Source: Company, Edelweiss Research

GRM comparison of Indian players – Mild YoY recovery likely


0.5

3.3

4.7

-0.2

0.01

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3.84.3

3

1.21.1

6.1

5.2

3.8

1.8

-0.5

0.9

2.3

3.7

5.1

6.5

Naphtha Gasoline Diesel Jet/Kero Pet Coke Fuel Oil SingaporeGRM

(USD

/ b

bl)

Q2FY21 Q3FY21 Q4FY21

-10.0

-5.0

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10.0

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M (

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bl)

BPCL IOCL HPCL RIL

Oil & Gas



Quarterly industry operational snapshot


Q4FY19 Q1FY20 Q2FY20 Q3FY20 Q4FY20 Q1FY21 Q2FY21 Q3FY21 Q4FY21E YoY (%)Refining Througput (MMT)IOCL 17.4 17.3 17.5 17.5 17.1 12.9 14.0 17.9 18.0 5.0BPCL 8.2 7.5 7.7 8.4 8.4 5.1 5.6 7.2 7.6 (10.0)HPCL 4.6 3.9 4.6 4.2 4.5 4.0 4.1 4.0 4.2 (7.0)Throughput Growth (YoY %)IOCL 1.2 (2.2) (1.6) (7.8) (1.4) (25.2) (20.3) 2.1 5.0BPCL 4.6 (3.7) 1.2 12.3 2.2 (31.0) (26.5) (13.9) (10.0)HPCL (0.6) (13.3) (4.2) (8.8) (1.3) 1.3 (11.0) (3.8) (7.0)GRM ($/bbl)IOCL 4.1 4.7 1.3 4.1 (9.6) (2.0) 8.6 2.2 3.5 NABPCL 2.7 2.8 3.4 3.2 0.8 0.4 5.8 2.5 4.0 433.3HPCL 4.5 0.8 2.8 1.8 (1.2) 0.0 5.1 1.9 2.5 NAInventory Gains ($/bbl)IOCL 2.7 1.1 (1.7) 2.1 (17.8) (6.4) 9.6 1.0 1.0 NABPCL 0.2 (0.9) (0.4) 1.0 (6.7) (1.5) 4.2 1.2 2.2 NAHPCL 2.4 (2.6) 0.3 0.3 (10.6) 0.9 2.4 2.8 1.5 NACore GRM ($/bbl)IOCL 1.4 3.6 3.0 2.0 8.2 4.4 (1.0) 1.2 2.5 (69.5)BPCL 2.6 3.7 3.8 2.2 7.4 1.9 1.6 1.2 1.8 (75.7)HPCL 2.1 3.3 2.6 1.5 9.4 (0.9) 2.7 (1.0) 1.0 (89.3)Marketing sales volume (MMT)IOCL 21.5 21.6 20.2 21.9 20.7 15.5 17.2 21.2 20.8 0.9BPCL 11.7 11.3 10.5 12.3 11.2 8.3 9.2 11.4 11.4 1.8HPCL 10.1 10.1 9.4 10.6 9.6 7.6 8.4 10.4 10.2 6.4Volume Growth (%)

IOCL 0.3 (0.4) (1.1) 1.6 (3.9) (28.3) (14.7) (3.2) 0.9BPCL 5.2 0.5 (1.0) 7.7 (3.5) (26.6) (12.0) (8.0) 1.8HPCL 7.0 3.8 2.8 8.6 (5.3) (24.5) (10.3) (1.7) 6.4Inventory Gains (INR/ltr)IOCL 0.1 0.1 0.2 (0.0) (1.0) 0.8 0.0 0.7 0.4 NABPCL 0.2 (0.1) 0.1 0.1 (1.5) 0.8 0.9 0.2 0.4 NA

HPCL 0.3 (0.0) (0.0) 0.2 (1.4) 0.5 1.3 0.6 0.6 NA


Q4FY21 preview


Marketing: Strong petrol margins in Q4FY21

Q4FY21 marked a sustained quarter for marketing margins across OMCs, with

margins continuing to track towards long-term trends. This was driven by: i) OMCs’

much higher margins in tier-2 cities/rural than metros; and ii) ATF/lubricants/other

industrial margins, which are typically higher than auto fuel margins.

Higher petrol marketing margins than diesel margins in Q3


Petrol demand (Jan-Feb-21) has increased 2% YoY


-2.5

2.5

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12.5

17.5

22.5

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Diesel Petrol

Gujarat elections

Karnataka elections Central

elections

Russia- Saudi oil price war on production

cuts

Surge in margins again after retailpetrol/ diesel prices started to

increases

-60.0

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MS Demand Growth

Oil & Gas



Diesel demand continues to lag in Q4FY21 (-5% YoY in Jan-Feb-21)


Demand for petroleum remain subdued in Jan-Feb-21 (-4% YoY)


-50.0

-35.0

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PP Demand Demand growth


Q4FY21 preview


City gas comparison—Volume growth at GGL surged, remained consistent at IGL and slowed at MGL


Sharp V-shaped volume recovery in Q4FY21 across CGDs


-60.0

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IGL MGL GGL IGL average MGL average GGL average

Oil & Gas



Comparison of EBITDA margins across CGDs (MGL stands higher)


Snapshot of Oil & Gas industry


2.0

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14.0

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cm)

IGL MGL GGL IGL average MGL average GGL average

All price charts cannot be included given the large of number of companies in our coverage. Specific charts may be available upon request


Q4FY21 preview


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This research report is a product of Edelweiss Securities Limited ("ESL"), which is the employer of the research analysts who have prepared the research report. The research analysts preparing the research report are resident outside the Canada and are not associated persons of any Canadian registered adviser and/or dealer and, therefore, the analysts are not subject to supervision by a Canadian registered adviser and/or dealer, and are not required to satisfy the regulatory licensing requirements of the Ontario Securities Commission, other Canadian provincial securities regulators, the Investment Industry Regulatory Organization of Canada and are not required to otherwise comply with Canadian rules or regulations regarding, among other things, the research analysts' business or relationship with a subject company or trading of securities by a research analyst.

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This report is distributed in Hong Kong by Edelweiss Securities (Hong Kong) Private Limited (ESHK), a licensed corporation (BOM -874) licensed and regulated by the Hong Kong Securities and Futures Commission (SFC) pursuant to Section 116(1) of the Securities and Futures Ordinance “SFO”. This report is intended for distribution only to “Professional Investors” as defined in Part I of Schedule 1 to SFO. Any investment or investment activity to which this document relates is only available to professional investor and will be engaged only with professional investors.” Nothing here is an offer or solicitation of these securities, products and services in any jurisdiction where their offer or sale is not qualified or exempt from registration. The report also does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of any individual recipients. The Indian Analyst(s) who compile this report is/are not located in Hong Kong and is/are not licensed to carry on regulated activities in Hong Kong and does not / do not hold themselves out as being able to do so. Copyright 2009 Edelweiss Research (Edelweiss Securities Ltd). All rights reserved.

Aditya Narain

Head of Research

[email protected]

low-base effect; better days ahead

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