Oil moderates — needs further correction: IIFL Capital Services

19 Aug 2022 , 01:38 PM

Oil down; needs to fall a lot more

Brent oil is down 25% from its peak, on slowing Chinese demand and likely deal with Iran; Russian oil continues to find buyers, which is also lowering the supply risk premium. Meanwhile, the SG GRMs have recovered to ~USD10/bbl, after a sharp correction, from peak of US$30/bbl, to below US$1/bbl. Gasoline cracks are now stabilizing, ATF and Gasoil cracks need to correct at least by 45-50%, for OMCs to have positive margins. The deltas across polyester intermediaries (PX/PTA/MEG) and polymers (PE/PP/PVC), continue to remain weak.
 
Cut PAT for upstream and downstream companies

Analysts at IIFL Capital Services have cut FY23/24 PAT estimates for upstream companies by 2-10%/12-15%, as they now model net realizations at US$75/bbl (trends in oil + additional duties) on unchanged gas prices. A US$1/mmbtu higher realization for APM gas implies 4-5% PAT upgrade. The earnings visibility is also poor for OMCs, which collectively have reported a loss of Rs185 billion in Q1. IIFL Capital Services’ 7-13% PAT cut is hopeful, and builds in policy support, failing which, OMCs collectively will report over Rs300 billion losses in FY23. Moderation in oil has offered some respite, though capex plans will be at risk, if losses sustain and WC balloons. CGDs rather offer good earnings on the back of strong volumes and policy support.

PSUs trade cheap

While earnings visibility is poor for PSUs, their valuations are cheap (trade below 1SD below decadal P/BV average), and to that extent, offer asymmetric payoffs. OMCs are well poised to re-rate if global growth slows down, leading to a softer oil price environment. IIFL Capital Services’ positive stance on CGDs holds (GGAS>IGL>MGL); while RIL’s O2C earnings may not be at risk, news flow continues to be hawkish (speculation on taxing domestic sales/changes in RTP, etc.); likely announcements in AGM will be seen as a key catalyst for the stock.