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MOSL: GASOLINE - The oil & gas monthly – July 2014




Motilal Oswal Securities Ltd.


12 Aug 2014





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GASOLINE: The oil & gas monthly – July 2014 SUMMARY - July 2014 Special Reports: a) Special Report: Breaking Free - Upstream Oil & Gas (b) 1QFY15 results: RIL, CAIR, PLNG, & IGL; (c) Interview with new Petroleum Minister Shri. Dharmendra Pradhan (Excerpts). Crude remain benign despite political instability, GRM down 9% MoM Despite Iraq oil supply concerns and a 9-month peak of USD115/bbl in Jun-14, Brent down -4% MoM led by adequate non-OPEC supplies. Crude price arbitrage helped US refinery inputs hit a record 9 year high 16.8mmbbl/d in mid-July 2014 (utilization at 103%). Reuters Singapore GRM is down 9% MoM to USD4.4/bbl (3rd month of consecutive decline) led by weaker middle distillate cracks. Sharp drawdown in Cushing crude inventory led to WTI premium over Brent on July 23, but Brent-WTI averaged USD4/bbl in July-14. Henry Hub gas price declined -10% MoM to USD4.1/mmbtu after remaining flattish for 3 months, led by lower demand in summer. Thematic report- Breaking Free – Upstream Right policies could (1) treble net govt. taxes, (2) add gas production equivalent to 15% of current oil imports. ONGC/OINL are top picks. Petchem margins expand helped higher prices and flat Naphtha price Polymer spreads up MoM (PE, PP : +4%; PVC: +8% MoM). Integrated polyester spreads expand by 16% MoM. Valuation and view We had downgraded Cairn to neutral in April 2014 due to near term production challenges and cash utilization concerns. Maintain Neutral on RIL as non-core capex to keep RoEs subdued. Maintain Neutral on Gail due to headwinds for gas availability and likely impact of domestic gas price hike. Recently downgraded PLNG to neutral led by rich valuations. Prefer ONGC/OINL in upstream and BPCL in OMC‘s (strong balance sheet and E&P potential) due to (a) Decision on gas pricing by 2QFY15 and (b) likely diesel deregulation in <3 months.

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