Sector Update | 3 July 2020
Oil & Gas
Oil & Gas
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US Shale industry- Bankruptcies on the rise
In our earlier report (Oil
not
low for long)
published on 1
st
Jun’20, we had
highlighted that few shale companies in the US had already gone bankrupt with
the possibility of a few more being on the way toward bankruptcy.
The total number of E&P bankruptcies has risen to 20 so far
(see exhibit 1, 2, 3).
The latest victim is Chesapeake Energy, one of the pioneers of the US shale
industry, with a total debt of USD9b. The lower prevailing oil prices are expected
to result in write-down of ~USD300b of global E&P assets.
Please refer our earlier reports
Crude Oil prices - Low not
for long
The US rig count fell to a record low
of 278 units in the week ended 26
th
Jun’20
(decline of 65% since Mar’20 and 72% YoY), even as oil prices rebounded from
historic lows as some producers restarted production. As per Baker Hughes
data, the worldwide rig count has declined 52% YoY to 1,073 units (v/s 2,221
units in Jun’19).
According to a Platts Analytics Spotlight report, rigs are expected to stay
relatively flat until early-2021 as operators are expected to wait several months
for higher oil prices before starting to gradually increase rig count.
Global lockdowns on account of COVID-19 has led to huge demand destruction,
which saw crude oil prices sink to historic lows. With lifting of the lockdowns
across the world, demand is again seeing an uptick. On the supply side,
production cuts, both intentional (OPEC++) and unintentional (due to poor
economies/bankruptcies), appear to be putting upward pressure on oil prices.
We reiterate our belief that in the near term Brent would stabilize between
USD40-50/bbl and settle at USD50-60/bbl in the longer run.
Indian upstream companies – growth in offing
Sensitivity for Indian E&P companies
Oil prices:
We have built in crude price assumption of USD50/bbl for FY22E (a
normalized scenario v/s USD40/bbl in FY21). On this, a change of USD1/bbl in oil
price impacts EPS of ONGC (consol.)/OINL by 3%/4%.
Gas prices:
Our gas price forecast stands at USD2.8/mmBtu for FY21 and
USD3.0/mmBtu for FY22E. A change of USD1/mmBtu in gas price for FY22E
would impact EPS by 22%/14% for ONGC (consol.)/OINL.
According to a
media article,
the government is formulating a structure to give
Indian upstream companies some relief in royalty and cess as well as certain
other reliefs. According to our model calculation, 1% change in cess results in
EPS change of 2%/4% for ONGC (consol.)/OINL.
ONGC did not see any reduction in crude oil demand starting 1
st
Apr’20.
However, gas production saw modest decline of 9% during the lockdown, which
has now been restored to normal pre-COVID levels.
In FY20, ONGC made total 12 discoveries (7 onshore, 5 offshore). Of this, 7 are
prospects (3 onshore, 4 offshore) and 5 are pools (4 onshore, 1 offshore). During
FY21, ONGC has notified 3 discoveries so far (2 in offshore deep-water KG-DWN-
98/2 block and 1 in onshore block in Nomination PML, Tripura).
ONGC: PT INR105 - Buy
Swarnendu Bhushan- Research Analyst
(Swarnendu.Bhushan@MotilalOswal.com)
Sarfraz Bhimani - Research Analyst
(Sarfraz.Bhimani@MotilalOswal.com)
3 July 2020
1
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.