Oil & Gas update - Outlook 2021: Vaccines to drive oil, LNG & GRM up YoY - ICICI Securities

Vaccine-driven demand recovery is likely to boost GRMs, oil and spot LNG, but hit Henry Hub prices and marketing margins. This augurs well for GAIL's H2FY21E-FY22E gas marketing and earnings outlook vs its poor showing in H1FY21. IOC's FY21E EPS would surge driven by marketing margins and inventory gains. Its reported FY22E EPS is estimated to fall (no inventory gains), but core EPS to rise YoY. FY21E-FY22E EPS of only GGL, GSPL and PLNG, whose volumes are back to pre-lockdown levels, are estimated to be up YoY. GGL is our top pick in CGD given its strong EPS and volume growth and as it is likely to be the least hit by competition. IGL and MGL are more vulnerable to competition though its impact may not be as severe as earlier thought and be visible only after some time.

- GGL and GSPL top picks: Notification of regulations allowing competition, OMCs demanding 90-100% rise in commission on CNG sold from their sites, and likely rise in domestic gas prices (committee is expected to propose a formula revision) do not augur well for IGL and MGL with high CNG in their sales mix. Regulations appear to have made it difficult for OMCs to hurt incumbents in retail CNG, but they may be hit if OMCs target BEST and DTC (10-43% of MGL-IGL's volumes). Despite likely strong H2FY21E EPS driven by lofty margins and no impact of competition in the near term, we reiterate SELL on IGL and REDUCE on MGL. Among CGD players, we prefer GGL. We estimate GGL's FY20-FY22E EPS CAGR at 22% (FY21E driven by margins and FY22E by volumes) and volume CAGR at 11% driven by ceramics, chemicals and pharmaceuticals and NGT order to implement ban on polluting fuels. We reiterate BUY on GGL and its parent GSPL (GGL is the main driver of GSPL's earnings). We retain HOLD on PLNG, despite its 21% 2-year EPS CAGR, given risk of domestic gas output rise and regas terminal overcapacity in Gujarat by FY23E.

- GAIL to gain from high oil prices: Hopes that Covid vaccines would boost demand has led to surge in oil prices, which however may be capped due to: 1) lockdowns in US and Europe hitting demand, and 2) rising Libya, OPEC+ and US output. US sanctions on Iran exports, if lifted, may lead to oil price fall. High oil prices have boosted US rig count, oil and associated gas output, which in turn has led to fall in Henry Hub (HH) gas prices. Current spike in spot LNG prices due to liquefaction capacity outages is likely to be shortlived, but modest capacity additions will keep spot LNG prices high (FY22-FY23 futures at US$6.2-6.0/mmbtu). High oil, spot LNG and low HH prices would mean GAIL's gas marketing EBITDA at Rs9.2bn in H2FY21E (minus Rs8.9bn in H1) and Rs8.2bn in FY22E. We estimate GAIL's FY21 EPS to be down 37% YoY, but FY22E PS to be up 17% YoY. Retain HOLD.

- GRM recovery key to IOC's stock performance: IOC's share price is down 24% in CY20-TD despite H1FY21 EPS being up 117% YoY (driven by marketing margins and inventory gains) and trading at 0.85x FY21E P/BV and dividend yield of 7.3%. GRM recovery may be the key to IOC's share price rising. We estimate rise in global refinery utilisation to 77.6% in CY21E from 72.4% (38-year low) in CY20E, on vaccines boosting global demand and refinery closures, driving rise in IOC's GRM and its core EPS (excluding inventory gain) by 31% YoY. Retain ADD.

Source : Equity Bulls

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