India Oil & Gas
Two Steps Ahead, a Lot More
to Go
Investment conclusion: We reiterate our In-Line view
on the industry, albeit we are becoming more bullish on
the upstream sector. In the last week the government
raised the auto fuel price, benchmarked Indian crude to
US$56-57/bbl, separated LPG and Kerosene subsidy
share from the upstream sector, and set up a committee
to look at oil price decontrol again. However, the
government has still not clarified whether auto fuel
prices are out of government price control and how the
subsidy share mechanism for auto fuel will work.
We upgrade ONGC to Equal-weight on the back of
positive steps toward fuel price decontrol and have
raised our F2010/11 earnings by 25% and 13%,
respectively. We now expect ONGC to realize
US$ 53.5/bbl in F2010 and US$55/bbl in the longer term.
ONGC trades at US$5.8/boe and 11x P/E based on
F2010E earnings, making valuation comparison to
global comps at US$12-13/boe and 13-14x P/E look
attractive.
We reiterate our Overweight stance on stocks in the
downstream sector ( BPCL, HPCL and IOCL): With
the government issue of Rs713 bn (US$15 bn) in oil
bonds, the debt to equity of the sector has fallen from a
peak of 6x in September 2008 to under 1.0x currently.
Although short-term earnings visibility in a high crude oil
price environment is still uncertain, the government has
taken some positive steps and the stocks are selling at
attractive P/Es of 7-9x F2010E earnings and 0.7-1.0x
P/B.
GAIL is our favorite Indian Oil PSU: We raise
earnings 17% and 13% for F2010/11, respectively, on
the back of higher petrochemical LPG prices and higher
gas volumes. GAIL trades at attractive valuations: P/E
of 11.4x F2011E earnings, EV/EBITDA 7.2x vs. P/E of
15-16x and EV/EBITDA of 9-11x for global and domestic
comps. Recent budget has provided tax incentives on
GAIL’s capital expenditures, which should improve its
cash flows.