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India Oil & Gas:Oil price weakness to persist; U-shaped recovery supportive of OMC performance

研究机构:摩根大通(亚太) 研究员:Neil Gupte,Scott L Darling 发布时间:2015-01-22

The Indian Oil Marketing Companies (OMCs) have outperformed by50%-140%/16-108% in absolute/relative terms over the past year - whilevaluations appear to reflect much of the past year's reforms/oil priceweakness, we see significant oil oversupply risks continuing. J.P. Morgan'sCommodities team has materially revised down its 2015/2016 Brentforecast from US$82/bbl to US$49/bbl and US$87.75/bbl to US$56.8/bblrespectively and we see a U-shaped recovery to US$90/bbl in 2019. This islikely to be supportive of OMC stock performance, which should in ourview see a gradual expansion of diesel marketing margins. With a softeroutlook for gas prices as well, we see continuing risks to ONGC earnings,and we reiterate our preference for the OMCs (HPCL/BPCL OW)

Oil price environment continues to be supportive of OMCperformance: We expect the OMCs to continue to outperform, aslower oil prices will aid a gradual expansion of diesel marketingmargins. Lower dependence on government aid will reduce leverage,with a curb on interest costs. The optionality of unlocking value frominfrastructure assets may support the cash flow outlook

HPCL our preferred pick: With the highest leverage to fallingsubsidies/rising marketing margins, we reiterate HPCL (OW) as apreferred pick in the space. While BPCL (OW) is also a beneficiary, itsupstream exposure could see a decline in value on our current oil priceoutlook. IOCL (N) could see weakness in the petrochemicals space andpotential government stake sale weigh on the stock. We do expectGRMs to moderate across the OMCs, and factor this in our earnings.

Near-term weakness could be an entry opportunity: 2HFY15 couldsee refining profitability impacted by large inventory losses – thiscould weigh on the OMC stocks near-term. We would look at this as anopportunity to add to positions. We adjust our FY16-17 EPS by 4%-20% for the OMCs.

Upstream remains under pressure: Despite a sharp pull back instock prices, we see upstream names as remaining under pressure withlow realizations likely to weigh on earnings. A lower than earlieranticipated gas price could also impact stock performance for ONGC(UW) in particular. We adjusted our FY15-17 EPS for ONGC/Cairn by20%-50% in this note.

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