Oil & gas: Same industry, different fates - Views on News from Equitymaster

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Oil & gas: Same industry, different fates

Jun 30, 2008

A value-chain describes the flow of activities within an industry. The oil and gas industry value chain is organised into exploration (upstream), transmission (midstream) and refining, petrochemicals and marketing (downstream). In this article, we shall look at how the profitability of the companies operating in the Indian oil and gas industry changes as we move along the value chain.

ONGC 37% 17%
IGL 42% 26%
GAIL 24% 15%
Gujarat Gas* 21% 14%
Petronet LNG 12% 7%
Castrol* 23% 15%
RIL 16% 10%
Chennai Petro 8% 4%
BPCL 3% 0%
HPCL 1% 1%
Source: Equitymaster Research
* 1QCY08

The upstream segment is currently enjoying favorable conditions due to the buoyant crude prices. However, it also has to subsidise roughly 1/3rd of the under recoveries of the downstream oil marketing companies. Although ONGC has reported strong operating margins (OPM) and net profit margins (NPM), they aren't as high as they should be.

The midstream segment (the companies mentioned handle natural gas; much of the oil midstream capacity is owned by IOCL) is doing well because these companies earn transportation charges on volumes transmitted. They aren't directly affected by high crude prices and the high demand for gas keeps their infrastructure operating at high levels. City gas distribution companies (IGL and Gujarat Gas) compete with the downstream oil marketing companies (OMCs) but enjoy freedom in pricing which gives them high margins. Petronet LNG is at the bottom of the pack because it imports and then regassifies liquid petroleum gas using high cost technology.

The downstream segment has two distinct types of players. The public sector OMCs (IOCL, BPCL, HPCL) and the others. The OMCs are in an extremely difficult position as the high crude price gets passed on to them as input cost and at the same time, government interferes in setting the output prices. As a result, they are unable to recover the cost and suffer huger operational losses.

The other players have avoided similar fates. Castrol sells lubricants. This part of the downstream segment is unregulated and the company enjoys brand loyalty. This reflects in its margins. Chennai Petro is a pure refiner and is not affected by the bugbear of underrecoveries, as it does not market its own refined products. RIL's main business is refining, and petrochemicals as its upstream business operations is yet to come on stream and contribute significantly. In the refining business, it has avoided the fate of the PSU OMCs by exporting most of its refined products. It is also able to absorb the high crude price in its petrochemicals segment as it can be passed on the ultimate consumer.

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