Outlook 2013: Looking for catalysts in
the absence of margin drivers
Reliance Industries is our top large-cap pick, Petronet LNG top mid-cap pick
________________________________________________________________________________________________________________
Deutsche Bank AG/Hong Kong
Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should
be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should
consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST
CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MICA(P) 072/04/2012.
Harshad Katkar
Research Analyst
(+91) 22 7158 4029
harshad.katkar@db.com
Amit Murarka
Research Analyst
(+91) 22 7158 4069
amit.murarka@db.com
Top picks
Reliance Industries (RELI.BO),INR855.15 Buy
Petronet LNG Limited
(PLNG.BO),INR165.65
Buy
GAIL (GAIL.BO),INR366.90 Buy
Companies Featured
Reliance Industries (RELI.BO),INR855.15 Buy
Cairn India (CAIL.BO),INR342.55 Hold
GAIL (GAIL.BO),INR366.90 Buy
ONGC (ONGC.BO),INR287.70 Buy
Oil India Limited (OILI.BO),INR484.05 Buy
Petronet LNG Limited
(PLNG.BO),INR165.65
Buy
HPCL (HPCL.BO),INR328.95 Sell
IOC (IOC.BO),INR282.50 Hold
BPCL (BPCL.BO),INR385.65 Sell
Indraprastha Gas (IGAS.NS),INR255.05 Hold
Gujarat State Petronet
(GSPT.BO),INR79.70
Hold
Essar Oil Ltd (ESRO.BO),INR73.15 Buy
This report changes ratings, target prices,
and/or estimates for several companies
under coverage. For a detailed listing of
these changes, please see Figure 1.
Deutsche Bank oil price forecasts indicate flat to down Brent oil prices in 2012-
2015E (Figure 17). We forecast marginal improvement in Asian refining
margins in 2013, and we are neutral to negative on chemicals. In this scenario
we are looking for catalysts: policy reforms, price revision or capacity
expansion. Our top picks, Reliance Industries (RIL) and Petronet LNG (PLNG),
fit these criteria. RIL should see capacity expansion in refining & petchem over
2013-2015, an accelerated pace of regulatory approvals in upstream, and
approval for a higher natural gas price. PLNG is set to benefit from capacity
expansion of 80% to ~18mmtpa over the next 15 months.
Raising RIL target price to INR1010, downgrading BPCL, HPCL to Sell
To factor in the impending gas price increase and development of the R-Series
and Satellite fields, we are raising the target price (TP) for RIL (Buy) by 12% to
INR1010. We prefer RIL to Cairn India (Hold, TP INR355) in the upstream
space. Among the gas utilities, we maintain our Buy rating on PLNG (TP
INR210) and GAIL (TP INR430), as we expect improved gas availability in 2013
driven by LNG imports. We are raising our target price for Essar Oil (Buy) by
27% to INR85, on upgrade in refinery complexity and roll-forward to FY14. We
downgrade BPCL (TP INR300) and HPCL (TP INR265) to Sell after the recent
outperformance and due to the necessity of high working capital borrowing to
fund the high level of fuel losses. We reiterate that BPCL and HPCL are minor
beneficiaries of any fuel price reforms. We are ahead of consensus on RIL’s
and PLNG’s earnings and at the top end of the Street on their target prices.
After an uncertain 2012, a lot to look forward to in 2013
The BSE Oil & Gas index has underperformed the BSE Sensex over the past
five years. We expect many of the reasons for this underperformance to be
addressed over the next 12 months.
Kick-starting upstream activity: The government has reportedly approved the
industry’s long-pending request to allow exploration in existing producing
blocks, a big positive for RIL and Cairn India. Over 2013, we expect the receipt
of regulatory approvals to restart exploration and development in RIL’s KGD6 /
NEC25/ CBM/ KGD3 blocks and Cairn’s Rajasthan block.
Gas price revision: Recently the Rangarajan Committee recommended an
international benchmark-linked domestic natural gas price (based on Henry
Hub of US, JCC of Japan and NBP of UK), which if implemented could almost
double the gas price for NELP blocks to cUSD7-8/mmbtu, encouraging
production from even currently unviable discoveries.
Domestic gas availability: After the fall in domestic gas availability in FY13, we
expect gas supplies to improve from FY14 by 7mmscmd yoy, driven initially by
increased LNG imports and aided by domestic production beyond 2015.
Fuel subsidies: Recently the government announced a cap on subsidized LPG
cylinders per consumer and is considering a phased increase in diesel and
kerosene prices, indicating its intention to curb the high level of fuel subsidies.
Valuation and risks
We value oil & gas companies on a DCF basis and refiners on EV/EBITDA. The
key risks to our recommendations are: 1) regulatory risks; 2) higher/ lowerthan-
forecast oil prices, refining margins or petrochemical margins; and 3)
global GDP growth that is higher/ lower than Deutsche Bank forecasts.