Sector Analysis - Oil & Gas

Introduction
The character of Chuck Noland in the movie Cast Away, near the end of the film says,
...because tomorrow the sun will rise. Who knows what the tide could bring? He makes
this observation after having survived on a desert island for four years before being rescued
and returned to civilization. The same is the feeling about the oil and gas right now
optimistic but extremely cautious.

Only now is the sector beginning to emerge from its upheaval. If there is hope on the
horizon, we must, like Noland in Cast Away, remain mindful of the risk.

As per the data available from 19th Sept to 19th October 2017, of BSE listed companies and
on the basis of parameters of percentage change in market capital & A/D ratio it can be
seen that the top 4 sectors showing positive trends are as follows:
Telecommunication
Oil & Gas
Consumer Durables
Metals & Mining
The Oil & Gas sector has shown a monthly rise of 9.37 % and an A/D ratio of 3.8. Oil & gas
Sector is one of the 6 core sectors of Indian economy and contributes to 15% of the GDP.
 16 4
% change in market capital
14 3.5
12 3

A/ D Ratio
10 2.5
8 2
6 1.5
4 1
2 0.5
0 0
Chemicals

Media & Entertainment

Tobacco
Conglomerates

Pharmaceuticals
Food & Beverages
Information Technology

Miscellaneous
Metals & Mining

Services

Utilities
Automotive
Banking & Financial Services
Cement & Construction

Consumer Durables

Engineering & Capital Goods

Manufacturing

Oil & Gas

Retail & Real Estate

Telecommunication
Consumer Non-durables

%Chg A/D Ratio

Figure 1: percentage change in market capital & A/D ratio, source money control

Constituents
Oil & Gas sector is constituted by the following sub-sectors:
Upstream segment/Exploration & production segment
Midstream segment/Storage & transportation segment
Downstream segment/Refining, processing & marketing

Oil & Gas

Sector

Upstream MidStream DownStream

Figure 2: Classification of Oil & gas Sector, Source-ibef.org

Based on the data from 19th September to 19th October 2017, of BSE listed companies rise in
oil & gas sector is constituted by the following subsector companies listed on the stock
exchange in table 1:
Sub sectors Percentage change Advancing Declining
in market capital shares shares
Oil drilling & exploration 2.59% 12 4
Refineries 11.38% 8 0
Table 1: Contribution of growth in oil & gas sector by sub-sectors, source: money control

Thus it can be concluded that strong performance by refineries is responsible for the strong
growth seen in the oil & gas sector. Apart from this the same can be observed from the
returns from S&P BSE Oil & Gas index over the varied time frame as shown in table 2:
Returns - S&P BSE Oil & Gas
Year to date 66.34%
1 Week 3.00%
1 month 5.10%
3 months 15.60%
6 months 12.20%
1 Year 31.90%
2 Year 70.60%
Table 2: Returns from S&P BSE Oil & Gas, source: money control

Growth Drivers
The growth drivers for Oil & Gas Sector can be attributed to the following factors:

Growing demand from domestic market

Oil consumption in India has grown at a CAGR of 2.98 % from FY2008 to 2017F to reach 4.13
mbpd by 2017. Thus increased demand by in domestic market is contributing to high sales
by companies. Moreover the demand for natural gas has grown at a CAGR of 3.05% due to
the transition of many vehicles into LNG. However this increase in demand has not
translated into increased sales for established companies like ONGC & OIL as the decreased
oil rates do not allow these companies to function at high levels of production. Thus the
excess demand has been met by the private and Joint venture companies.

Year ONGC OIL Private/ Joint Venture

2011 24855 3572 5263
2012 23716 3847 10527
2013 22561 3661 11640
2014 22246 3466 12076
2015 22264 3412 11785
2016 22368 3226 11356
2017 22218 3480 10839
Table 3: Crude oil production (thousand tonnes), Source: ibef.org
 70 8
Domestic gas production & import(bcm)

60 7

Oil consumption in India(mbpd)

6
50
5
40
4
30
3
20
2

10 1

0 0
2008 2009 2010 2011 2012 2013 2014 2015 2016

Domestic gas production & imports(bcm) Oil consumption in India (mbpd)

Figure 3: Gas demand & Oil consumption in India, Source: ibef.org

Rise in price of oil

After the fall of oil price in 2011 which led to heavy erosion of margins of oil & gas
companies, now the increase in the price due to the various geopolitical reasons has led to
increase in share value of company on account of increased investor confidence & better
margins.

S&P BSE Oil & Gas index & WTI oil Price
18,000.00 $90.00
16,000.00 $80.00
S&P BSE Oil & Gas Index

14,000.00 $70.00
WTI oil Price(USD)

12,000.00 $60.00
10,000.00 $50.00
8,000.00 $40.00
6,000.00 $30.00
4,000.00 $20.00
2,000.00 $10.00
0.00 $-

S&P BSE oil & gas index WTI Oil Price

Figure 4: Source-investing.com
Some of the geopolitical reasons which have resulted in increase in oil prices are as follows:
i. OPEC nations & Russia implementing production cuts to boost oil prices in the supply
market by creating artificial scarcity.
ii. Defeat of ISIS in Iraq & Syria has resulted in decrease of sale of crude oil in black
market. At its high point ISIS sale of dirty oil was one of the main factors which
resulted in decline in oil price to $30-40 per barrel.
iii. In the short run, hurricane Harvey had resulted in the stoppage of many oil
rigs in the US Gulf Coast which has resulted in the propping up of Brent crude
oil price by 22.52% from 2nd July, 2017 to 15th October, 2017 as shown in
figure 4. Average Brent crude price was uo 13% YoY to USD 51.5/bbl as per
Motilal Oswal sector report September 2017. Thus the margins of companies
like ONCG & Oil India should see YoY EBITDA increase.
iv. Speculations over embargo over Iran by the new US administration
v. Increased natural gas demand in lieu of migrating towards greener fuels.

Brent Oil Price

$60.00

$55.00

$50.00

$45.00

$40.00
Oct 01, 2017

Oct 08, 2017

Oct 15, 2017

Aug 06, 2017

Aug 13, 2017

Aug 20, 2017

Aug 27, 2017

Sep 03, 2017

Sep 10, 2017

Sep 17, 2017

Sep 24, 2017

Jul 02, 2017

Jul 09, 2017

Jul 16, 2017

Jul 23, 2017

Jul 30, 2017

Figure 5: Source-investing.com

Increased Gross Refining Margin(GRM)

GRM is the difference between the total value of petroleum products coming out of an oil
refinery and the cost of crude. The benchmark Singapore complex GRM rose to USD 8.3/bbl
in 2QFY18 vs USD 6.4/bbl in 1QFY18 and USD 5.1 /bbl in 2QFY17. Thus the inventory gains
are further boosting company earnings.
Moreover GRM of RIL for the second quarter of FY18 came in at USD 12/bbl which is a 9
year high GRM clocked by the company which outperformed the Singapore complex margin
by USD 3.7/bbl.

Government policies
Government has enacted various policies such as New Exploration Licensing Policy(NELP) &
Coal Bed Methane policy to encourage investments. It has also allowed 100% FDI in
upstream & private sector refining projects. The FDI limit for public sector refining projects
has been raised to 49% without any divestment or dilution of domestic equity in existing
PSUs. Thus the favourable government policy has assisted in Reliance & BP Plc investing Rs
40,000 crore in the D6 gas field of KG basin to boost production over the next 3-5 years.
Also policies like UDAN and Regional Connectivity Scheme(RCS) will boost the demand of
Aviation Turbine Fuel(ATF) resulting in increased business for Oil & Gas companies.

Risk factors

Migration to eco-friendly fuel

The voluntary implementation of the Paris Climate Accords by participating nations has led
to the creation of sentiment due to which fossil fuel will be phased out in due time. The
Indian government has also increased efforts to reduced reliance on conventional fuel and
migrate to renewable sources of energy. Moreover electric vehicles have been promoted by
countries like China, India, EU nations, etc which has resulted in slightly stagnant demand.
Due to this companies in Oil & gas sector will have to devise new strategies in the long run
to withstand changing policy landscape.

Impact of GST on Upstream Oil & Gas

Upstream business, in particular, is situated unfavourably in terms of tax liabilities on

account of non-uniform treatment under the GST regime. Tax-related under-recoveries
could seriously affect its profitability. While products like kerosene, naphtha and LPG will be
under GST regime, the GST law would not apply for the time-being on five specified
petroleum products viz. Crude Oil, Natural Gas, High Speed Diesel (HSD), Motor Spirit
(Petrol), and ATF. Consequently, the main products of E&P sector viz Crude Oil & Natural
Gas, will continue to attract the existing levies i.e. Royalty, OID Cess, NCCD, VAT/ Sales Tax
etc. However, purchase of goods and services required for exploration and production of
Crude Oil and Natural Gas would attract GST. Further, exemption on procurement of select
goods through ICB Tender have been amended to include 5% GST and also increase in tax on
services could lead to substantial additional tax implication on upstream companies. Unlike
other industries which can take credit for any taxes paid towards furtherance of business,
no credit on input GST will be available to the oil and gas industry for the time-being leading
to additional tax burden as a result of stranding of taxes.

Conclusion
Thus Oil & Gas Sector in the foreseeable future due to the plethora of diversified products
they provide and recent rise in oil prices after a slump period will result is better earnings of
the sector companies making it attractive for investment. Thus it is the rise of the new dawn
in oil & gas sector.