GR Exclusive! OMCs’ To Report Lackluster Quarter, Robust Q3 On Cards For Indigo: Analysts Q3 Preview

Oil prices are likely to remain volatile in 2024 with growing concerns about oversupply, slowing economic growth, and simmering Middle East tension.

A recent Reuters survey of 30 forecasts from economists and analysts sees Brent crude averaging $84.43 a barrel in 2024. Renowned brokerage firm, Emkay Global Financial Services has shared its outlook for 2024 for the oil, gas, and aviation sector. Overall in the O&G sector, while the brokerage firm expects a neutral show from RIL, it foresees a sequential decline in earnings across key oil companies. The Gas sector should be stable. In Aviation, Indigo would report strong PAT, led by healthy core metrics.

In the first two quarters of the last financial year, OMCs managed to make healthy profits compared to the initial half of the prior fiscal primarily on the back of improved marketing margins.

Marketing margins of the three public-sector companies improved in the last quarter owing to discounted Russian crude oil even as the OMCs kept the prices of auto fuels unchanged which helped them to recover losses incurred when oil prices were higher last year.

However, in 2024, analysts at Emkay expect OMCs' earnings to decline due to lower GRMs & marketing margins, and inventory losses. Diesel marketing margins fell to negative ~Rs0.5/ltr, while petrol margins improved 20% to Rs6.8/ltr in Q3FY24. LPG margins also turned negative, at ~Rs60/cyl. Brent averaged at ~USD84/bbl in Q3FY24, down 3% QoQ, closing ~USD19/bbl lower at ~USD78/bbl between the two-quarter ends, thereby resulting in refining inventory losses of USD2.5-3/bbl for OMCs. Benchmark GRMs also slumped, to USD5-6/bbl from USD9-10/bbl QoQ, due to a correction in distillate spreads. Russian crude discounts shrank, while Middle-East OSPs were slightly higher.

The brokerage firm expects OMCs to record a 70-80% decline in EBITDA QoQ. Q3FY24E PAT for IOCL is estimated at Rs26bn, while BPCL/HPCL would see PAT of Rs6/2bn, respectively.

Upstream to see higher opex; OIL to record good output.

Windfall-adjusted oil realizations sustained at ~USD75/bbl. ONGC/Oil India's crude output is estimated to decline 2%/grow 7% YoY, while gas is forecast to decline 4%/grow 4%. Analysts at Emkay estimate an EBITDA decline of 14% QoQ for ONGC, on higher opex and lower output, with OIL also likely seeing a similar fall. We estimate ONGC/OIL's RPAT at Rs84/16bn during Q3FY24. OIL's consolidated earnings would remain range-bound QoQ, on stable NRL earnings amid healthy utilization.

GAIL, GSPL, and PLNG's core performance to be largely range-bound:

GAIL's Q3FY24E standalone PAT is estimated at Rs20.3bn, down 16% QoQ and gas marketing margins are expected to decline 25% QoQ. Gas volumes would be slightly up QoQ, while Petchem is expected to break even on lower gas costs and ~95% plant utilization levels. LPG earnings are likely to stabilize, as Aramco's LPG OSPs have increased ~35% QoQ. GSPL's volume is likely to be up 3% QoQ, but EBITDA would decline 7% on higher opex and lower tariffs. PLNG's Dahej utilization should be steady at ~96%, with Kochi at 20%. For PLNG, a 3% lower APAT is expected at Rs7.9bn, while implied marketing margin is assumed to be healthy QoQ at ~USD3.5/mmbtu, but with spot volumes being lower.

IGL's margins to decline on APM cut, but volume growth to recover from the Q2 lows; margins to be range-bound for Gujarat Gas amid some volume growth QoQ:

IGL is likely to witness a 7% QoQ decline in EBITDA to Rs6.1bn in Q3FY24E, as unit EBITDA would fall 9% QoQ to Rs7.8/scm owing to higher gas costs, likely due to lower APM allocation; volume growth should be 5% YoY. Morbi volumes are expected to be flattish, resulting in Gujarat Gas's volumes growing 5% QoQ to 9.8mmscmd. However, EBITDA/scm would be slightly lower, by 3% QoQ to Rs5.6, on higher gas cost. PAT is expected to improve marginally, by 2% QoQ to Rs3bn.

RIL likely to see marginal QoQ decline in EBITDA:

According to Emkay, RIL's consolidated EBITDA is likely to drop 2% QoQ to Rs403bn, with O2C EBITDA declining 12% to Rs144bn on lower GRMs, accentuated by sustained weakness in petchem margins and reduced volumes. The firm expects a net subscriber addition of ~10.5mn for Jio, with a 0.5% higher ARPU at Rs182.5. Retail EBITDA should increase 7% QoQ to Rs63bn, while upstream EBITDA is expected to grow 7% QoQ to Rs51bn, as KG-D6 volumes are likely to average at ~30mmscmd in Q3. The analysts estimate consolidated APAT (after the JPL-RRVL MI) to drop, by 3% to Rs168bn.

GOLI likely to witness ~12% YoY core volume growth, with EBITDA/ltr up 8% QoQ to Rs17, mainly on lower unit opex. Q3FY24E EBITDA/PAT of the company is expected to grow 18%/21% QoQ to Rs1.18bn/891mn, respectively.

Indigo Likely to Report Robust Q3FY24 Results:

Robust Q3 is on the cards for Indigo, supported by better load factors and strong yields. We estimate yields to jump up 15% QoQ to Rs5.1, besides a 9% hike in fuel cost/ASK, driven by a rise in ATF prices. PLFs would also be seasonally strong, at ~87%, as ASK/RPK rise 25%/28% YoY (a 2%/6% QoQ rise) to 36.0/31.3bn. We estimate PBT/ASK to come in at Rs0.44, with net income at Rs15.8bn, for Q3FY24 (up 12% YoY).

Gujarat State Petronet, Gujarat Gas, Petronet LNG - Target Price

Emkay has maintained a buy rating for Gujarat State Petronet and Petronet LNG with a target price of Rs 335 per share and 245 per share respectively. The brokerage firm has reduced its target price for Petronet LNG to Rs 440 per share.

Lower spot LNG prices improve the outlook for gas utilities

Spot LNG prices have corrected by over 30% in the past 1-2 months to USD11- 12/mmbtu currently, as the ongoing winter season peaks, with no major disruptions and the near-to-medium term supply outlook looking comfortable, as per our checks. Major spot LNG plays in our coverage universe are Gujarat State Petronet (GSPL), Gujarat Gas (GUJGA), and Petronet LNG (PLNG), which tend to benefit from lower rates.

Buy Call On ONGC and OIL:

Emkay has raised its SOTP-based Sep-24E TP for ONGC/OIL by 7%/20% to Rs250/445, assigning an implied FY25E consolidated earnings multiple of 6.5x/7.0x vs. ~6x each earlier. The value of investments is also up for ONGC and OIL as downstream entities record strong earnings and stock run-up. We retain our BUY rating on ONGC and OIL.