Oil & Gas - SUMMARY - September 2012 - Motilal Oswal

- Brent flat MoM at USD113/bbl; 2QFY13 averaged at USD110/bbl: Brent prices averaged USD113/bbl (flat) in Sep-12 amidst and heightened uncertainty in market fundamentals, geopolitcs and QE3 impact. Oil demand outlook continues to remain weak with projected demand growth of ~0.8mmbbl/s in 2012 and 2013.

- Reuters Singapore GRM down 14% MoM to USD8.9/bbl: Drop in gasoline and diesel cracks resulted in decline in GRM. 2QFY13 GRM averaged USD9.1/bbl v/s USD6.7/bbl in 1FY13 and USD9.1/bbl in 2QFY12. Unless meaningful refinery closures happen, we expect refining margins to remain subdued as the global operating rates (ex of US) are likely to remain low led by lower demand (particularly in Europe) and commissioning of new refineries.

- Polymer and polyester margins marginally up: On MoM basis, polymer and integrated polyester spreads were up 1-3%, except PVC which was up 11.8% due to low base. On QoQ basis, 2QFY13 Polymer spreads are down 7-8%, while integrated polyester spreads are down 2-4%. Upcoming festive season/ winter could lift near-term margins.

- Valuation and view: Diesel price hike/limiting subsidized LPG cylinders will reduce under recoveries. OMC's are at attractive valuations and BPCL is our top pick for its E&P upside potential. Likely further positive policy actions and attractive valuations augur well for ONGC and Oil India. Maintain Neutral on GAIL and GSPL due to headwinds on incremental gas in medium term. However, domestic gas scarcity augurs well for Petronet LNG. RIL's new mega projects (petcoke gasification and off-gases cracker) are likely to add to earnings from FY15/FY16, however the medium term outlook on core business remain weak with RoE reaching sub-15%, Neutral.

Source : Equity Bulls

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