Sector Update | 9 December 2019
Oil & Gas
Oil & Gas
Please refer our
earlier report on GRMs
OPEC cuts but duds to balance prices
The 7
th
OPEC and non-OPEC Ministerial Meeting agreed an additional cut of
0.5mnbopd starting 1
st
Jan’20 on the 1.2mnbopd cut agreed in Dec’18.
This leads to a total agreed cut of 1.7mnbopd. Also, a few countries, mainly
Saudi Arabia, are likely to continue voluntary additional cuts, resulting in a total
expected cut of ~2.1mnbopd (OPEC: 1.59mnbopd; non-OPEC: 0.51mnbopd).
The additional cuts (of 0.9mnbopd) are in line with the expected call on OPEC
crude, which is at 29mnbopd for 2020, down ~1mnbopd from the 2019 call at
30mnbopd.
However, tepid demand has not resulted in any spike in crude oil prices amidst
expected growth in US oil production and non-compliance of OPEC+.
Supply side caveats to stay…
Please refer our
earlier report on Gas space
The aforementioned production cut (of 0.5mnbopd) is subject to full conformity
by every country participating in the Declaration of Corporation (DoC).
Even in the past, Saudi Arabia, the UAE and Kuwait complied, while others
including Russia, Oman and Nigeria failed to attain 100% compliance.
Additionally, domestic oil production from the US has touched an all-time high
of ~12.2mnbopd in 3Q2019 (~9% up from ~11.2mnbopd in 3Q2018), with the
EIA forecast standing at ~13.4mnbopd for 4Q2020.
The forward Brent curve trades into backwardation,
with 3M forward (Feb’20)
at USD64.4/bbl and 12M (Dec’20) at USD59.5/bbl.
…while demand concerns remain
Please refer our
earlier report on ONGC
Concerns about global economic growth and incremental oil demand prevail,
with various downward revisions to the forecast built at the beginning of 2019.
The IEA revised down its global economic growth forecast to 2.9% for 2019
(from 3.2%) and to 3.0% for 2020 (from 3.4%) during its OECD Interim Economic
Outlook (in Sep’19).
Reflecting on the lower global GDP outlook, the IEA also revised down its global
oil demand forecast by 0.4/0.2mnbopd to 1.0/1.2mnbopd for 2019/20.
OPEC has similar estimates of global economic growth of 3% and oil demand
growth of 1.1mnbopd for 2020.
In the absence of a global recovery, increasing trade concerns and rising
domestic production from the US,
we revise down our Brent oil price forecast
for FY19/20 to USD65/bbl from USD70/bbl.
Valuation and view
We expect crude prices to remain <USD70/bbl over the medium term, de-risking the
burden of government subsidies, favoring domestic E&P business in the likes of
ONGC and Oil India.
ONGC: Gas production to get a fillip (click
here for the report).
Our domestic gas production estimates are at 25.9/30.6/35.2bcm for
FY20/21/22 coupled with production coming online from Daman and KG-
DWN98/2. Our assumptions are conservative compared to the company's
Swarnendu Bhushan – Research Analyst
(Swarnendu.Bhushan@MotilalOswal.com); +91 22 6129 1529
Sarfraz Bhimani – Research Analyst
(Sarfraz.Bhimani@MotilalOswal.com); +91 22 6129 1566
Investors are advised to refer through important disclosures made at the last page of the Research Report.
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.
 Motilal Oswal Financial Services
Oil & Gas
guidance due to the expected delays in execution amidst difficult topology for
key projects (like KG-DWN-98/2).
We estimate domestic crude oil production at 23.7mmt/24.0/24.0mmt for
FY20/21/22 amidst new addition of oil, which should majorly help (a) offset
depletion from old fields and (b) maintain stable oil production for ONGC.
The stock has an attractive dividend yield of ~6.0-6.1% and PBV of ~0.6x each for
FY20-22.
The stock is trading at 4.3x FY22E consol. EPS of INR29.6. We value the company
at 8x FY21E standalone EPS of INR15.4 (excluding other income), adding the
value of investments. We reiterate our Buy rating with a target price of INR156,
implying a 23% upside to the current market price.
Oil India
We expect no incremental change in production volumes for both oil and gas for Oil
India.
Dividend yield is attractive at 7.5%-7.8% for FY20-22 v/s 6.5% in FY19.
The stock trades at 5.8x FY21E EPS of INR27.4. We use an SOTP-based fair value
of 8x FY21E adj. EPS of INR24.1 and add investments of INR49 to arrive at a price
target of INR194, implying a 23% upside.
Maintain Buy.
Exhibit 1: Global demand/supply snapshot and outlook (IEA)
OECD DEMAND (mnbopd)
Total OECD
Total Non-OECD
Total Demand
OECD SUPPLY
Total OECD
Total Non-OECD
Others
Total Non-OPEC Supply
Total OPEC
Total Supply
Total Stock Ch. & Misc
Call on OPEC crude + Stock ch.
2016
47.1
49.3
96.4
23.5
31.1
4.7
59.3
37.8
97.0
0.6
31.7
2017
47.6
50.6
98.2
24.4
31.0
4.7
60.1
37.5
97.6
-0.5
32.5
2018
47.8
51.5
99.3
26.9
31.1
4.9
62.9
37.4
100.3
1.0
30.8
1Q19
47.6
51.6
99.1
27.9
31.4
4.6
63.9
36.2
100.1
1.0
29.7
2Q19
46.9
52.4
99.4
28.2
31.0
5.2
64.4
35.6
100.1
0.7
29.4
3Q19
48.4
52.9
101.3
28.1
31.4
5.6
65.1
34.9
99.9
-1.3
30.8
4Q19
48.5
52.9
101.4
29.2
31.5
5.0
65.7
2019
47.8
52.4
100.3
28.3
31.3
5.2
64.8
2020
48.1
53.4
101.5
30.2
31.6
5.2
67.0
30.2
30.0
29.0
Source: IEA, MOFSL
9 December 2019
2
 Motilal Oswal Financial Services
Oil & Gas
Exhibit 2: OPEC / Non OPEC production agreed cuts
Total OPEC production in
Sep’19 stood at
~28.8mnbopd, ~16% lower
than sustainable production
capacity of ~34.4mnbopd.
mnbopd
2018 Cuts
Agreed cut
Algeria
Angola
Congo
Ecuador
Equatorial Guinea
Gabon
Iraq
Kuwait
Nigeria
Saudi Arabia
UAE
Total OPEC 11
Iran
Libya
Venezuela
Total OPEC
Azerbaijan
Kazakhstan
Mexico
Oman
Russia
Others
Total Non-OPEC
Total OPEC+
0.032
0.047
0.010
0.016
0.004
0.006
0.141
0.085
0.055
0.322
0.096
0.814
Average
Compliance
105%
268%
-172%
-31%
453%
-457%
-60%
148%
-20%
268%
115%
152%
2019 Cuts
Additional
agreed cuts
0.012
-
0.004
-
0.001
0.002
0.050
0.055
0.021
0.567
0.060
0.772
Total cuts
0.044
0.047
0.014
0.016
0.005
0.008
0.191
0.140
0.076
0.889
0.156
1.586
Sustainable
Production
Capacity**
1.050
1.450
0.350
0.550
0.120
0.210
4.900
2.930
1.800
12.000
3.410
3.850
1.100
0.650
34.370
0.020
0.040
0.040
0.025
0.230
0.028
0.383
1.197
141%
296%
252%
67%
73%
-37%
110%
138%
0.007
0.017
0.018
0.009
0.070
0.010
0.131
0.903
0.027
0.057
0.058
0.034
0.300
0.038
0.514
2.100
**Sustainable production capacity can be reached in 90 days
Source: IEA, MOFSL
Exhibit 3: Brent oil forward curve
USD/bbl
64.4
63.4
62.6 62.1
61.6 61.2
60.8 60.4
60.1 59.8 59.5
59.3 59.0 58.9 58.7
Source: Bloomberg, MOFSL
9 December 2019
3
 Motilal Oswal Financial Services
Oil & Gas
ONGC
Exhibit 4: ONGC: Key Assumptions
Year End: March 31
Exchange Rate (INR/USD)
APM Gas Price (USD/mmbtu)
Brent crude price (USD/bbl)
Production Details (mmtoe)
Domestic Oil Prodn (mmt)
Domestic Gas Prodn (bcm)
Domestic Prodn (mmtoe)
OVL Production (mmtoe)
Group Production (mmtoe)
Subsidy Sharing (INRb)
ONGC Subsidy
Oil Price Realization (USD/bbl)
Gross
Upstream Discount
Net
FY14
60.6
4.2
107.8
26.0
24.9
50.9
8.4
59.3
564
106.7
65.8
40.9
FY15
61.4
4.9
86.0
25.9
23.5
49.5
8.9
58.3
363
86.0
40.9
45.1
FY16
65.5
4.7
47.6
25.9
22.5
48.5
8.9
57.4
17
48.6
1.8
46.8
FY17
67.1
3.1
48.6
25.5
23.3
48.8
12.8
61.6
0
50.2
0.0
50.2
FY18
64.5
3.0
57.6
26.2
25.6
51.8
14.2
66.0
0
57.4
0.0
57.4
FY19
70.0
3.5
70.1
24.2
25.8
50.0
14.9
64.9
0
68.9
0.0
68.9
FY20E
71.3
3.8
64.7
23.7
25.9
49.6
14.9
64.5
0
FY21E
73.8
3.7
65.0
24.0
30.6
54.6
14.9
69.5
0
FY22E
73.8
3.9
65.0
24.0
35.2
59.2
14.6
73.8
0
63.5
65.0
65.0
0.0
0.0
0.0
63.5
65.0
65.0
Source: Company, MOFSL
Exhibit 5: ONGC: Financials & Valuation (INR b) (Consol.)
Y/E March
2014
1,745
590
262
20.4
8.3
134.1
16.2
14.3
6.2
0.9
3.1
5.0
2015
1,609
547
184
14.3
-30.0
140.6
10.4
9.1
8.9
0.9
3.6
5.0
2016
1,357
452
174
13.6
-5.0
154.1
9.2
8.3
9.3
0.8
4.0
4.5
2017
3,257
580
288
22.4
64.9
151.5
14.7
11.1
5.7
0.8
3.9
5.5
2018E
3,622
644
259
20.2
-9.9
159.0
13.0
9.2
6.3
0.8
4.0
5.2
2019
4,535
839
348
27.1
34.4
170.0
16.5
11.1
4.7
0.7
3.1
5.2
2020E
4,408
760
308
24.0
-11.6
185.0
13.5
9.6
5.3
0.7
3.5
6.1
2021E
4,855
847
361
28.2
17.4
204.1
14.5
10.3
4.5
0.6
3.0
6.0
2022E
4,959
861
379
29.6
5.0
224.8
13.8
10.3
4.3
0.6
2.7
6.0
Sales
EBITDA
Adj. PAT
Adj. EPS (INR)
EPS Gr. (%)
BV/Sh.(INR)
RoE (%)
RoCE (%)
Valuation
P/E (x)
P/BV (x)
EV/EBITDA (x)
Div. Yield (%)
Source: Company, MOFSL
9 December 2019
4
 Motilal Oswal Financial Services
Oil & Gas
Oil India
Exhibit 6: OIL India: Key Assumptions
Year End: March 31
Exchange Rate (INR/USD)
APM Gas Price (USD/mmbtu)
Brent Crude Price (USD/bbl)
Production Details
Oil (mmt)
Gas (bcm)
Total (mmtoe)
Subsidy Sharing (INRb)
Oil Price Realization (USD/bbl)
Gross
Upstream Discount
Net
EPS (INR/sh.)
FY14
60.6
4.2
107.4
3.50
2.63
6.13
87
106.4
59.3
47.1
26.4
FY15
61.1
4.8
85.5
3.44
2.72
6.16
55
84.3
37.3
46.9
19.4
FY16
65.4
4.7
47.5
3.25
2.84
6.09
2
46.4
1.0
45.3
22.3
FY17
67.1
3.0
49.0
3.28
2.94
6.22
-
47.4
-
47.4
23.9
FY18
64.5
3.0
57.6
3.39
2.89
6.29
-
56.4
-
56.4
23.6
FY19
64.5
3.5
70.1
3.32
2.72
6.05
-
68.9
-
68.9
32.0
FY20E
71.3
3.8
64.7
3.35
2.72
6.08
-
63.5
-
63.5
26.6
FY21E
73.8
3.7
65.0
3.36
2.72
6.09
-
65.0
-
65.0
27.7
FY22E
73.8
3.9
65.0
3.37
2.72
6.10
-
65.0
-
65.0
27.4
Source: Company, MOFSL
Exhibit 7: Oil India: Financials & Valuation (INR b) (standalone)
y/e march (INR b)
Sales
EBITDA
Adj. PAT
Adj. EPS (INR)
EPS Gr. (%)
BV/Sh.(INR)
RoE (%)
RoCE (%)
Valuations
P/E (x)
P/BV (x)
EV/EBITDA (x)
Div. Yield (%)
6.0
0.9
4.5
7.2
8.2
0.7
5.6
6.7
7.1
0.7
5.6
6.1
6.6
0.6
6.8
7.0
6.7
0.6
5.7
6.5
4.9
0.6
3.5
6.5
5.9
0.6
3.6
7.5
5.7
0.6
3.3
7.8
5.8
0.5
3.2
7.8
2014
91.3
35.5
29.8
26.4
-16.9
183.2
14.9
6.0
2015
92.3
30.1
21.9
19.4
-26.5
212.0
9.8
3.8
2016
92.7
30.7
25.2
22.3
14.9
220.5
9.4
4.1
2017
93.6
29.6
27.0
23.9
7.2
257.4
5.7
3.5
2018E
106.6
39.1
26.7
23.6
-1.2
246.9
9.4
4.8
2019
137.3
54.8
36.2
32.0
35.6
245.5
9.3
6.8
2020E
132.5
52.4
30.1
26.6
-16.8
260.2
10.5
6.0
2021E
139.7
54.8
31.3
27.7
4.1
275.5
10.3
5.9
2022E
140.8
54.4
31.0
27.4
-1.1
290.6
9.7
5.6
Source: Company, MOFSL
9 December 2019
5
 Motilal Oswal Financial Services
Oil & Gas
NOTES
9 December 2019
6
 Motilal Oswal Financial Services
Oil & Gas
Explanation of Investment Rating
Investment Rating
BUY
SELL
NEUTRAL
UNDER REVIEW
NOT RATED
Expected return (over 12-month)
>=15%
< - 10%
< - 10 % to 15%
Rating may undergo a change
We have forward looking estimates for the stock but we refrain from assigning recommendation
*In case the recommendation given by the Research Analyst is inconsistent with the investment rating legend for a continuous period of 30 days, the Research Analyst shall within following 30
days take appropriate measures to make the recommendation consistent with the investment rating legend.
Disclosures
The following Disclosures are being made in compliance with the SEBI Research Analyst Regulations 2014 (herein after referred to as the Regulations).
Motilal Oswal Financial Services Ltd. (MOFSL) is a SEBI Registered Research Analyst having registration no. INH000000412. MOFSL, the Research Entity (RE) as defined in the Regulations,
is engaged in the business of providing Stock broking services, Investment Advisory Services, Depository participant services & distribution of various financial products. MOFSL is a subsidiary
company of Passionate Investment Management Pvt. Ltd.. (PIMPL). MOFSL is a listed public company, the details in respect of which are available on www.motilaloswal.com. MOFSL
(erstwhile Motilal Oswal Securities Limited - MOFSL) is registered with the Securities & Exchange Board of India (SEBI) and is a registered Trading Member with National Stock Exchange of
India Ltd. (NSE) and Bombay Stock Exchange Limited (BSE), Multi Commodity Exchange of India Limited (MCX) and National Commodity & Derivatives Exchange Limited (NCDEX) for its
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9 MOFSL has not received any compensation or other benefits from third party in connection with the research report
10 MOFSL has not engaged in market making activity for the subject company
********************************************************************************************************************************
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-
financial interest in the subject company
-
actual/beneficial ownership of 1% or more securities in the subject company
-
received compensation/other benefits from the subject company in the past 12 months
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other potential conflict of interests with respect to any recommendation and other related information and opinions.; however the same shall have no bearing whatsoever on the specific
recommendations made by the analyst(s), as the recommendations made by the analyst(s) are completely independent of the views of the associates of MOFSL even though there
might exist an inherent conflict of interest in some of the stocks mentioned in the research report.
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 Motilal Oswal Financial Services
Oil & Gas
acted as a manager or co-manager of public offering of securities of the subject company in past 12 months
be engaged in any other transaction involving such securities and earn brokerage or other compensation or act as a market maker in the financial instruments of the company(ies)
discussed herein or act as an advisor or lender/borrower to such company(ies)
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received compensation from the subject company in the past 12 months for investment banking / merchant banking / brokerage services or from other than said services.
The associates of MOFSL has not received any compensation or other benefits from third party in connection with the research report
Above disclosures include beneficial holdings lying in demat account of MOFSL which are opened for proprietary investments only. While calculating beneficial holdings, It does not consider
demat accounts which are opened in name of MOFSL for other purposes (i.e holding client securities, collaterals, error trades etc.). MOFSL also earns DP income from clients which are not
considered in above disclosures.
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analyst(s) was, is, or will be directly or indirectly related to the specific recommendations and views expressed by research analyst(s) in this report.
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Registered Office Address: Motilal Oswal Tower, Rahimtullah Sayani Road, Opposite Parel ST Depot, Prabhadevi, Mumbai-400025; Tel No.: 022 71934200/ 022-71934263; Website
www.motilaloswal.com.CIN no.: L67190MH2005PLC153397.Correspondence Office Address: Palm Spring Centre, 2nd Floor, Palm Court Complex, New Link Road, Malad(West), Mumbai-
400 064. Tel No: 022 7188 1000.
Registration Nos.: Motilal Oswal Financial Services Limited (MOFSL)*: INZ000158836(BSE/NSE/MCX/NCDEX); CDSL and NSDL: IN-DP-16-2015; Research Analyst: INH000000412. AMFI:
ARN - 146822; Investment Adviser: INA000007100; Insurance Corporate Agent: CA0579;PMS:INP000006712. Motilal Oswal Asset Management Company Ltd. (MOAMC): PMS (Registration
No.: INP000000670); PMS and Mutual Funds are offered through MOAMC which is group company of MOFSL. Motilal Oswal Wealth Management Ltd. (MOWML): PMS (Registration No.:
INP000004409) is offered through MOWML, which is a group company of MOFSL. Motilal Oswal Financial Services Limited is a distributor of Mutual Funds, PMS, Fixed Deposit, Bond,
NCDs,Insurance Products and IPOs.Real Estate is offered through Motilal Oswal Real Estate Investment Advisors II Pvt. Ltd. which is a group company of MOFSL. Private Equity is offered
through Motilal Oswal Private Equity Investment Advisors Pvt. Ltd which is a group company of MOFSL. Research & Advisory services is backed by proper research. Please read the Risk
Disclosure Document prescribed by the Stock Exchanges carefully before investing. There is no assurance or guarantee of the returns. Investment in securities market is subject to market risk,
read all the related documents carefully before investing. Details of Compliance Officer: Name: Neeraj Agarwal, Email ID: na@motilaloswal.com, Contact No.:022-71881085.
* MOFSL has been amalgamated with Motilal Oswal Financial Services Limited (MOFSL) w.e.f August 21, 2018 pursuant to order dated July 30, 2018 issued by Hon'ble National Company
Law Tribunal, Mumbai Bench.
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