Motilal Oswal Financial Services

Sector Update | 22 November 2019

Oil & Gas

Glut in refining suppresses GRMs



Singapore (SG) GRM shot up during 2QFY20 due to rise in petrol and FO cracks

(report

link),

averaging USD6.3/bbl for the quarter. Continued demand

weakness combined with normalization of FO supply resulted in SG GRM

declining to USD4.1/bbl and USD1.7/bbl in Oct’19 and Nov’19 YTD, respectively,

from USD7.6/bbl in Sep’19.

We estimate that a total of 2.6mnbopd of refining capacity came online in 2019

against incremental demand of 0.8mnbopd (revised down from 1.1mnbopd at

the start of the year).

In absence of global recovery,

we anticipate that GRMs would remain

suppressed for few more months

in lieu of incremental refining capacity

addition.

Refiners add to the glut



Our earlier BPCL update



At the beginning of 2019, IEA forecasted incremental demand of 1.4mnbopd of

oil consumption; it was revised down to 1.0mnbopd in their latest report.

At the start of 2019, IEA anticipated incremental capacity addition of

2.6mnbopd while our research shows that the said capacity has already come

up. Even though it is less than IEA’s forecast, it is much ahead of the incremental

oil demand.

To make matters worse, Chinese teapot refineries have ramped up their

utilization rate to ~67% vis-à-vis 61% in Oct-Nov’18 as the country increased

crude oil import quotas for the former in 2019.

The higher capacity addition in 2019 is also a response to the higher diesel

demand post implementation of IMO 2020.

IMO 2020 boost to GRM – a mirage!

With incremental demand of 2.0mnbopd of diesel as a result of IMO 2020, it

was anticipated that diesel cracks would jump sharply. Most also believed that

GRMs would spurt.

On the contrary, our belief was that although diesel cracks might improve, there

would be no commensurate demand for the higher production of other refinery

products. As a result, GRMs may not improve. However, refiners would still

benefit through higher utilization of their assets.

Despite IMO just 50 days away, diesel cracks have failed miserably to revive in

line with the street expectation of USD25-30/bbl (link) (~USD11/bbl for Nov’19

YTD v/s USD14/bbl in 2QFY19). More importantly, the forward curve for diesel

depicts an incapacitated scenario of a mere USD14-16/bbl.

We believe that as low GRMs persist, higher cost refiners would close their

operations and SG GRM would revert to the long-term average of USD5-6/bbl.



Swarnendu Bhushan- Research Analyst

(Swarnendu.Bhushan@MotilalOswal.com); +91 22 6129 1529

Sarfraz Bhimani - Research Analyst

(Sarfraz.Bhimani@MotilalOswal.com); +91 22 6129 1566

22 November 2019

Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.

Investors are advised to refer through important disclosures made at the last page of the Research Report.

Oil & Gas

Valuation and recommendation



Our preference stays with IOCL, which has the most diversified EBITDA profile;

35% of IOCL’s EBITDA comes from refining. Its free cash flow is estimated to be

INR15/share for FY20-21.

We reiterate Buy recommendation for HPCL. However, we also note the

company’s rising net debt and project execution as risks to our call.

BPCL has outperformed the Nifty by ~40% on hopes of privatization (since

Aug’19). We believe that there are too many complexities involved here, which

may not be solved by FY20-end.

Exhibit 2: Gasoil forward curve range – USD14-16/bbl

USD/bbl

16.3 16.5

16.7 16.6

16.4

Exhibit 1: Refining addition in 2019 (as per our research)

Refineries

RAPID

STAR Refinery

Huabei Refinery

Hengli Petrochemical Group

Brunei Refinery & Aromatics complex

Hengyi Industries

Egyptian Refining Co.

NWR Sturgeon

Limetree Bay

Total

Country

Malaysia

Turkey

China

Egypt

Canada

USA

Capacity

(kbpd)

300

350

100

400

160

650

2,600

16.2

16.0 16.1 16.1 16.0

15.5

14.6

Jan- Feb- Mar- Apr- May- Jun- Jul- Aug- Sep- Oct- Nov- Dec-

20 20 20 20 20 20 20 20 20 20 20 20

Source: Company, MOFSL

Exhibit 3: Product yields for Indian Refiners

(%)

IOCL

BPCL

HPCL

MRPL

RIL

HSD

Exhibit 4: SG GRM trend

-2

Avg.: 5.8

Source: Indian PNG Statistics, MOFSL

Source: Company, MOFSL

Exhibit 5: YoY growth in MS/HSD consumption in India

20%

13%

-3%

-10%

HSD

Exhibit 6: China net exports have risen with higher run-rate

000'mmt

3,200

2,400

1,600

800

Net export from China

Teapots runrate (RHS)

(%)

Source: Company, MOFSL

22 November 2019

Oil & Gas

Explanation of Investment Rating

Investment Rating

Expected return (over 12-month)

BUY

>=15%

SELL

< - 10%

NEUTRAL

< - 10 % to 15%

UNDER REVIEW

Rating may undergo a change

NOT RATED

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.

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********************************************************************************************************************************

22 November 2019

Oil & Gas

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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.

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* MOSL 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.

22 November 2019