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Oil & gas: Fates continue to differ - Views on News from Equitymaster

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Oil & gas: Fates continue to differ

Aug 4, 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 the previous quarter (4QFY08), we looked at how the profitability of the companies operating in the Indian oil and gas industry changes as we move along the value chain. In this article, we shall revisit their performance in 1QFY09 to ascertain the changes.

  • Also read - Oil & gas: Same industry, different fates

    OPM NPM
    4QFY08 1QFY09 4QFY08 1QFY09
    Upstream
    ONGC 37% 59% 17% 33%
    Midstream
    IGL 42% 40% 26% 23%
    GAIL 24% 24% 15% 16%
    Gujarat Gas* 21% 18% 14% 14%
    Petronet LNG 12% 12% 7% 6%
    Downstream
    Castrol* 23% 20% 15% 13%
    RIL 16% 15% 10% 10%
    Chennai Petro 8% 10% 4% 6%
    BPCL 3% -2% 0% -3%
    HPCL 1% -1% 1% -3%
    Source: Equitymaster Research * 1QCY08 & 2QCY08 respectively

    Upstream
    The upstream segment continues to enjoy favorable conditions due to the buoyant crude prices. In fact, ONGC's operating margins (OPM) and net profit margins (NPM), improved substantially in 1QFY09 over 4QFY08. However, it continues to subsidise a substantial portion of the under recoveries of the downstream oil marketing companies. Unfortunately, this burden is announced in an ad hoc manner. As a result earning visibility remains poor.

    Midstream
    The midstream segment continued to do 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. There was no substantial change in either the operating or net margins of the midstream companies in 1QFY09. We believe, this segment of the energy sector will continue to be insulated to gyrations in commodity prices or a possible slowdown in the economy.

    Downstream
    The downstream segment has two distinct types of players. The public sector OMCs (IOCL, BPCL, HPCL) and the others. The OMCs continue to be in an extremely difficult position as 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 huge operational losses. These companies suffered the most in 1QFY09, as crude prices spiraled upwards mounting further underrecoveries on them. They were also hit by one time provision of employee benefits.

    The other players managed to avoid a similar fate even in 1QFY09. Castrol sells lubricants. This part of the downstream segment is unregulated and the company enjoys brand loyalty. This reflects in its margins, which only suffered a small decline. As a pure refiner, Chennai Petro benefited from the buoyant gross refining margins (GRMs). RIL's result were strangely subdued this quarter with it clocking GRMs lower than those of the public sector refineries. One of the possible reasons is that it holds lower inventory of crude as compared to its public sector counterparts. As crude prices spiked during the quarter, fresh contracts of crude made RIL's inputs costs higher in comparison to its peers.

  • Also read - Results scoreboard for 1QFY09


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