O i l & G a s Oil Marketing Companies
August 26, 2019
Diesel Gasoline Propylene
Fuel Oil Petcoke
Jal Irani Vijayant Gupta +91 22 6620 3087 +91 22 4040 7402 Edelweiss Securities Limited [email protected] [email protected] Oil & Gas
Executive Summary
A dual bonanza from a step change in competitiveness – greater complexity at refineries – and a structural uptick in global refining margins (GRMs) is set to light up Indian oil marketing companies (OMCs). Marketing margins too are likely to remain well-oiled. These evolving dynamics would pump up their earnings to a 12% CAGR over FY19–21E. To be precise, we are raising FY21E earnings across OMCs by 15% (now 16% above consensus). Even so, OMCs trade at a compelling 26% discount to global peers and 40% discount to their historical multiples. In fact, at FY21E PEs of 5x, IOCL and HPCL imply negative terminal growth rates. We are retaining IOCL (TP: INR182) as our top sector pick given its steady earnings, superior profitability and high dividend yield (7.4%). We are raising SoTP-based TP for HPCL by 55% to INR348 as we bring its target multiples by division on a par with BPCL anticipating greater integration gains. Upgrade HPCL to ‘BUY’; retain ‘BUY’ on BPCL (TP: INR442).
Fortifying refining competitiveness moat Indian refiners rank at the bottom of the operating and capex cost curves. Our analysis by product shows that the OMCs are, in fact, gunning for high-margin distillate (diesel) yields, which would fortify their competitiveness. The upgrade is opportune as it would fire up their diesel crack spreads by 46% as the new IMO regulation kicks in from January 2020.
Global GRMs: Poised for structural gains… We forecast a prolonged period of high global GRMs. Capacity additions are modest at best given very long gestation of seven–ten years (for greenfield plants) that coincides with concerns of oil demand peaking by 2030. We argue, even in the near term, overcapacities shall get absorbed by CY20 while the slowdown in subsequent capacity additions would lift global utilisation rates in the vicinity of all-time highs.
…but valuations at 26% below global imply negative growth At FY21E EV/EBITDA of 4–6x, OMCs are trading 40% below their long-term average and 26% below global peers’ despite high dividend yields of 5–7% and superior profitability. This implies negative terminal growth, and seems incongruous with OMCs’ growth trajectory.
Pecking order: IOCL, HPCL and BPCL We believe IOCL offers the greatest upside potential among OMCs due to its highest middle- distillate yield, the cushion of an annuity pipeline business, strongest RoCE (13% FY21E) and dividend yield (7.4% FY20E). HPCL ranks second with highest growth in refining output, maximum benefits from bottom upgradation and refining integration. BPCL ranks last given lack of refining expansion, premium valuations and long-gestation upstream assets.
Key risks: Modest near-term RoCEs, government stake sale overhang Near-term RoCEs shall be modest at 11–13% (FY21E) as OMCs are aggressively expanding capital-intensive and long-gestation refinery businesses. Greater integration, though, shall add to margins and enhance strategic positioning. The proposed sell-down in government stake (including government-owned entities) to 51% is an overhang for IOCL and BPCL.
1 Edelweiss Securities Limited
Oil & Gas
Contents
Executive Summary ...... 1
Investment Rationale: Cracking Complexity ...... 3
Focus charts: India’s rising refining complexity to enhance competitiveness ...... 7
Key risks: Modest RoCEs and stake sale overhang ...... 11
India refiners: Multiple growth levers...... 13
India marketing: Stable margins ...... 26
Valuations: Deep discount ...... 35
Global refining upcycle imminent ...... 47
Companies
Indian Oil Corporation ...... 72
Bharat Petroleum Corporation ...... 96
Hindustan Petroleum Corporation ...... 115
Edelweiss Securities Limited 2 Sector Update
Investment Rationale: Cracking complexity
The current confluence of circumstances is conducive for OMCs’ earnings growth and presents a unique investment proposition in our view. We dig deeper and unearth: 1) Global refining is poised for a structural uptick in margins as concerns around oil demand peaking by 2030 are discouraging capacity additions, which typically have long gestation of seven– ten years. This shall assure high GRMs for a long time. 2) Our analysis by product reveals that OMCs’ distillate yields are set to rise, which shall structurally improve their competitiveness and enhance GRMs. Indian refiners have among the lowest operating and capital costs globally. 3) OMCs are likely to clock a healthy 12% earnings CAGR (FY19–21E) as benchmark GRMs are estimated to rebound by USD2.9/bbl; consensus is pricing in a modest 6% CAGR. 4) And yet, OMCs are trading at a compelling 26% discount to global peers and 40% discount to their own historical multiples. In fact, at an FY21E PER of 5.1x and 4.7x, IOCL and HPCL, respectively, imply negative terminal growth rates. We are upgrading HPCL to ‘BUY’ (target price: INR348) while reiterating IOCL (target price: INR182) as our top pick. BPCL ranks last in our pecking order with a target price of INR442/share (refer to figure 1).
Global refining outlook: Look at large gains beyond near-term pain Cyclical rebound likely after near-term pain Singapore complex GRM collapsed by 32% during 2018 to USD4.9/bbl, purportedly in anticipation of a sizeable 2mmbpd capacity addition during 2019 outpacing incremental demand of 1.2mmbpd. However, actual capacity addition in 2019 is likely to lag around 0.5mmbpd; moreover, more than 70% of the additions are slated for commissioning in November–December. Consequently, we estimate the surplus that would spill over into 2020 would be limited to 0.3mmbpd. We demonstrate that this addition would be absorbed over 2019–20, and the market would return to a deficit by 2021 (Refinery additions are back ended in 2019).
Ahoy incumbents – Long gestation and advent of EVs dissuading new capacities We believe refining capacity additions would whittle down after 2020 as concerns pertaining to the advent of electric vehicles and long gestation of seven–ten years for new refineries take over. Consequently, higher global utilisation rates would benefit incumbent refiners with ready capacity, which would allow them to sell oil products at higher GRMs.
Advantage Indian refiners Most competitive and poised for structural uptick Indian refiners boast the highest middle distillate yield (50%+) globally. With stricter IMO norms kicking in early next year, they are in a sweet spot to gain from even higher diesel cracks. Besides, management teams across OMCs are focusing on upgradation of bottoms, which would replace low-margin heavy distillates with profitable light- and middle-distillates (refer to chart 2). We also demonstrate that Indian refineries are among the most competitive globally (refer to table 2) with shortest payback periods owing to extremely competitive project cost (capital cost of USD400/tonne versus global average of USD540/tonne) as well as operating cost (USD2–2.5/bbl versus global average of USD4/bbl). (India refiners: Multiple growth levers)
3 Edelweiss Securities Limited
Oil & Gas
Sustained capacity deficit – India in a sweet spot According to BP Global Energy Outlook 2019, India will become the largest growth market displacing China, accounting for over 25% of global demand growth by 2040. Among major economies, we expect India to record highest demand growth with a five-year CAGR of 4.6% versus capacity growth of 2.9%. According to BP, India and China would together contribute half of incremental demand over the next five years. We estimate incremental demand in India over the next five years would be of 1.3mmbpd while capacity additions would lag at 0.7mmbpd, resulting in a product deficit of over 13% of domestic capacity (refer to chart 3).
Double bonanza for GRM recovery – IMO regulation and domestic supply deficit The new International Maritime Organisation (IMO) norm stipulates maximum allowable sulphur content in shipping fuel of 0.5% by weight globally (versus 3.5% currently). This would affect 5mmbpd of marine fuel (3.2mmbpd fuel oil, 1.5mmbpd gasoil).
Global oil economics expert Dr. Fereidun Fesharaki forecasts that the IMO norm shall result in incremental diesel demand of 1.4mmbpd during 2020, thereby widening diesel cracks by 46% to USD21/bbl during the year. He highlights refiners with a higher diesel yield will tend to benefit more due to this regulation.
We infer Indian refiners – at the top by middle-distillate yields – would benefit from notably higher GRMs (refer to chart 1). As a culmination of improving global trends, widening domestic deficit, gains from IMO regulations and India’s structural advantage, we expect GRMs to spurt 65% across OMCs by FY21E from a four-year low during FY19. (Read our note GRM recovery imminent; oil prices range-bound ).
Healthy retail business — A shot in the arm Oligopoly OMCs protected by high barriers; We believe that the integrated business model presents a high barrier to entry in a three- player oligopoly, which allows for high profitability over long periods. OMCs have been able to defend retail market shares and keep private share below 10%. We estimate gross marketing margins would remain between to INR3–4/litre over the forecast period, which is in line with OMCs’ long-term IRR targets. (India marketing: Healthy Margins).
Margins oil price-neutral Although we expect oil prices to remain benign (Oil prices to remain range-bound), it does not underpin our bullish view on OMCs. Oil prices are subject to variables that render any forecast prone to error. However, we believe that even if oil prices revert to the highs seen in October last year, marketing margins are likely to be steady as OMCs exercise pricing freedom in the post-election era (refer to chart 4).
Prospects of healthy earnings growth Consensus sentiment: Reversing towards bullishness Since the lows plumbed on 6 October, 2018, OMC stocks have recovered as markets have started pricing in normalisation of marketing margin. We believe consensus sentiment is taking a U-turn with earnings for FY20/21E remaining largely flat this year versus sharp downward revisions in FY19. However, we believe there is ample room for consensus upgrades; we estimate an EPS CAGR of 12% over FY19–21E while consensus expects 6%. With OMCs’ GRMs
Edelweiss Securities Limited 4 Sector Update
likely to flare up 60–65%, we are building in higher FY21 estimates than consensus (16% higher on average; refer to charts 5 and 6). (Markets have started pricing in an earnings recovery)
Compelling valuations Valuations at half of past average imply negative terminal growth; dividend yield of 5–7% At FY21E EV/EBITDA of 4–6x, OMCs are trading 40% below their long-term averages and 26% below the global peer average despite their all-time high dividend yields. This implies OMCs are pricing in negative terminal growth, which seems incongruous with their aforesaid growth trajectory (Valuations: Nascent recovery, several legs yet to run). The valuation gap vis-a-vis western peers has also widened: OMCs have historically traded at an average premium of 6% to western refining peers; currently, they are trading at a steep discount of more than 37%.
IOCL top pick; upgrading HPCL on strong growth prospects We believe IOCL offers the greatest potential upside among OMCs due to its superior middle- distillate yield, the cushion from petrochemical earnings, highest dividend yield (7.4%), strongest RoCE (12.9%), and steady cash flow. HPCL ranks second with a significant pickup in refining output and improved risk profile due to the narrowing gap between its refining and marketing output.
Given its 7.5% earnings CAGR over FY19–21E and lowest valuation among OMCs (4.3x FY21E EV/EBITDA), we are upgrading HPCL to ‘BUY’. BPCL is the least preferred, although its valuations are compelling too. The stock offers decent upside potential, but its valuation is relatively expensive. Negligible refining capacity additions and sub-par returns on upstream assets historically push it down to number three in our pecking order (refer to figure 1).
Key risks: Modest near-term RoCEs and government’s stake sale overhang OMCs are investing heavily in refining—a lower ROCE business than oil marketing. Their falling RoCEs are an added risk to investing in capital-intensive and long-gestation refining businesses. However, greater integration into refining would add to margins and enhance strategic positioning. Notably, RoEs are fairly high, ranging between 18% and 22% (FY21E).
Another risk is the government’s recent announcement that it intends to bring down the stake below 51% in OMCs as long as the combined stake (government + government-owned entities) remains above 51%. This is a potential overhang on IOCL and BPCL as the government currently owns 52% and 53%, respectively. However, we believe these risks are more than adequately reflected in OMCs’ compelling valuations (refer to table 1).
Table 1: Revision in estimates IOCL HPCL BPCL Comments FY20E FY21E FY20E FY21E FY20E FY21E PAT (new) INR mn 187,321 233,782 64,944 77,251 81,652 94,356 GRMs rise by USD0.5–1.0/bbl, factoring in PAT (old) INR mn 184,213 228,046 55,623 63,539 71,483 71,370 enhanced distillate yields; higher interest, % revision 1.7 2.5 16.8 21.6 14.2 32.2 depreciation partly offset higher GRMs Target price (new) INR 182 348 442 Target price (old) INR 174 225 393 % revision 4.6 54.7 12.5 Source: Edelweiss research
5 Edelweiss Securities Limited
Oil & Gas
Fig. 1: Pecking order: IOCL is our top pick, followed by HPCL and BPCL
Rating BUY BUY BUY
Target Price 182 348 442
Upside (%) 47.0 42.0 29.0
Middle distillate yield (FY21E) (%) 55.0 46.0 55.0
EBITDA growth (FY19-21E) (%) 15.1 7.5 10.7
Return on Capital (FY21E) (%) 13.012.9 11.4
Return on Equity (FY21E) (%) 18.521.9 22.5
Valuation multiple (FY21E PER)(x)5.1 4.7 7.1
Valuation multiple (FY21E EV/EBITDA) (x) 4.44.3 5.7
Valuation multiple (FY20E dividend yield) (%) 7.48.3 5.5
Net debt-equity (FY21E) (x) 0.51.1 1.2
Superior Moderate Low Source: Edelweiss research Note: Valuations based on 22nd August 2019
Edelweiss Securities Limited 6 Sector Update
Focus charts: India’s rising refining complexity to enhance competitiveness
Chart 1: Benchmark GRM to rebound to USD7.8/bbl on capacity deficit and new IMO norm 3.0 15
2.2 12
1.4 9
(Mmb/d) (US$/bbl) 0.6 6
(0.2) 3
(1.0) 0
2002 2005 2008 2011 2014 2017 2001 2003 2004 2006 2007 2009 2010 2012 2013 2015 2016 2018 2019
2020E 2023E 2021E 2022E
Incremental Demand Incremental Capacity Singapore GRM
Source: FGE, BP Review, Edelweiss research
Chart 2: Indian refiners in a sweet spot – Highest distillate yields and high heavy crude sourcing
80.0 Indian refiners lie at the top end of the spectrum with high distillate yield and greater flexibility on crude sourcing PTT 64.0 IOCL Repsol S-Oil BPCL SK Energy 48.0 Total HPCL Sinopec Exxon Mobil Shell Reliance 32.0 Andeavor
Marathon Middle Distillate Distillate Middle Yield (%) 16.0 Aramco PetroChina Refining Capacity
0.0 0 3 6 9 12 15
Nelson Complexity Index Source: Company reports, IEA, ENI, Edelweiss research
7 Edelweiss Securities Limited
Oil & Gas
Chart 3: Indian refiners boast lowest capital costs, leading to lower payback
Source: FGE, Bloomberg, Company reports, Edelweiss research
Chart 4: OMCs underperformed prior to elections due to pressure on marketing margins; significant recovery thereafter
1,170 293 Generally, OMC stocks have underperformed the Pre election year index in a pre-election year, while the 952 outperformance has been signficant post elections 241
734 190
515 138
(Jan 2007: (Jan 100) Indexed Brent PriceIndexed Brent
Indexed share performance Indexed share 297 87
79 35
2007 2010 2012 2013 2015 2018 2008 2009 2011 2014 2016 2017 2019
BPCL HPCL IOCL NIFTY Brent (RHS)
Source: Edelweiss research
Edelweiss Securities Limited 8 Sector Update
Chart 5: Valuations 36%/40%/49% below ten-year average for BPCL/HPCL/IOCL 12.5 +1SD
10.7 +1SD +1SD 8.9
-1SD 7.1 -1SD EV/ EBITDA (x) EBITDA EV/ -1SD 5.3
3.5 BPCL IOCL HPCL
EV/EBITDA Consensus EV/EBITDA (Edel estimates) 10 year avg
Sources: Bloomberg, FGE, PPAC, Edelweiss research
Chart 6: Our target prices at top end of consensus range 600
480
360
240 (INR/share)
120
0 HPCL BPCL IOCL
Low-High Mean Current price Target Price Sources: Bloomberg, Edelweiss research
9 Edelweiss Securities Limited
Oil & Gas
NA
5.5
2.0
8.6
5.8
7.5
(%) (%)
-6.6
22.9
17.3
15.1
36.4
10.7
18.9
19.8
75.7
20.5
11.1
10.0
16.0 131.0
FY19-21E EPS CAGR EPS
5.3
8.0
4.6
3.2
2.8
2.2
3.4
2.9
3.8
4.3
3.4
3.9
3.6
6.6
3.5
0.6
7.1
8.3
5.5
7.4
*LC for Local currency for *LC Local currency
(%) (%)
FY20E
Div yield Div
8.6
8.4
8.2
9.9
7.2
8.8
3.8
5.5
5.7
4.7
7.1
5.1
13.4
10.9
20.7
16.1
17.6
14.5
16.1
17.0
FY21E
P/E (x)
Source: Company, Edelweiss Company, Source: research
0.4
0.2
0.3
0.6
0.5
0.7
0.6
0.2
0.5
0.4
0.4
0.6
1.4
1.8
1.5
0.8
0.8
0.7
0.9
0.7
FY19
Note: Valuations August 2019 based 22nd on
D/E (x) D/E
NA
8.8
5.1
FY21E
10.8
18.7
17.5
13.4
13.8
25.3
16.3
18.5
16.7
13.5
13.6
16.3
11.0
21.0
21.9
22.5
18.6
*Consensus estimates companies for coverage non other
ROE (%) ROE
7.6
7.5
4.0
7.7
8.5
8.9
8.4
6.5
11.4
12.2
20.3
10.2
13.2
10.6
13.5
11.8
12.4
12.9
11.4
13.0
FY21E
Global peers Y/ecalendar on Y/eversus March forcompanies Indian
7.5
7.2
3.6
8.0
8.4
7.9
8.5
9.9
5.4
8.1
3.2
11.6
12.6
21.3
10.1
10.9
11.9
12.8
11.7
11.3
FY20E
ROCE (%) ROCE
7.5
7.2
3.6
9.4
8.4
7.9
8.5
9.9
5.4
3.1
4.4
-6.0
11.6
13.0
21.3
11.0
12.8
14.7
12.7
10.9
FY19
6.4
4.6
4.9
9.7
9.3
6.2
5.5
7.2
5.9
6.8
4.4
5.7
4.8
4.3
5.7
4.4
10.2
10.8
10.7
10.4
FY21E
6.7
4.7
5.0
7.9
7.6
8.6
7.6
8.8
5.6
8.4
5.6
5.2
6.5
5.2
10.4
10.9
11.1
10.1
11.4
12.5
FY20E
EV/EBITDA( x) EV/EBITDA(
5.4
3.4
3.2
9.4
9.7
7.5
5.8
7.6
9.2
8.2
5.9
5.0
7.0
5.8
10.6
11.9
10.3
14.6
20.1
15.5
FY19
0.5
0.3
3.9
3.5
1.9
7.7
10.3
10.4
51.2
10.4
96.9
50.6
48.0
24.8
3,103
FY21E
0.5
0.3
3.7
3.2
1.7
5.8
7.8
4.5
4.8
32.4
80.4
42.6
41.5
19.8
3,139
FY20E
Diluted EPS (LC)Diluted EPS
0.5
0.3
2.8
2.7
1.0
7.3
5.4
1.9
11.9
66.8
43.9
39.7
18.4
FY19
(13.8)
2,774
420
3,238
8,295
5,700
1,437
5,085
9,938
89,920
26,081
35,194
46,512
36,590
15,927
Mcap
163,270
112,598
(USD mn) (USD
Table 2: Valuation Snapshot Valuation 2: Table
APAC Refining-Mean
Sinopec
Petrochina
Vietnam National Petroleum
APAC Refining
Europe Refining-Mean
Dcc Plc
Rubis
Neste Oyj Neste
Europe Refining
US Refining-Mean US
Valero Corp Energy
Phillips 66
Marathon Petroleum Corp
US Refining US
India Refining-Mean India
Chennai Petroleum Corp Ltd
Mangalore Refinery & Petrochemicals Ltd
Reliance Industries Limited
India Refining India
India OMC-Mean India
Hindustan Petroleum Corporation Limited
Bharat Petroleum Corporation Limited
Indian Oil Corporation Limited
India OMC India Company
Edelweiss Securities Limited 10 Sector Update
Key risks: Modest RoCEs and stake sale overhang
RoCEs in the near term will remain capped as OMCs are aggressively expanding their capital-intensive and long-gestation refinery businesses. RoEs are fairly high within 18– 22% though. Besides, greater integration shall improve margins as well as reinforce their strategic positioning. In our view, OMCs’ current compelling valuations adequately capture these risks and more.
Spike in leverage across OMCs With a spurt in capex across OMCs, their leverage is likely to flare up. In fact, we expect borrowings to double on average across OMCs. Consequently, the net debt-equity at BPCL/HPCL would rise to 1.2/1.1x during FY21E from a comfortable 0.9/0.7x currently. Additionally, in light of the relaxation of external commercial borrowings up to USD10bn, OMCs have ratcheted up their external borrowings, which exposes them to currency risk. Relatively, IOCL is most comfortably placed in terms of leverage as its operating cash flow is most closely aligned to capex requirements (refer to chart 7). We expect IOCL’s net debt- equity to fall from 0.7x to 0.5x over the same period (refer to chart 8).
Projects with long gestation to dampen near-term returns OMCs have started diversifying from their core operations of refining & marketing into upstream, LNG and city gas distribution (CGD) projects. These projects would account for a significant portion of incremental capex and take five–ten years to operationalise. As a result, RoCEs across OMCs are likely to remain capped in the near term.
Chart 7: RoCE to remain capped with capex surge… Chart 8: …and result in negative FCF, especially for HPCL
24.0 250 2.0
20.5 180 1.6
110 1.2 17.0
40 0.8 (%)
(INR bn) (INR ROCE (%) ROCE 13.5 (30) 0.4
10.0 (100) 0.0
FY17 FY18 FY19
FY17 FY18 FY19
FY23E FY20E FY21E FY22E
FY20E FY21E FY23E FY22E Capex Free cash flow Net Debt/Equity IOCL BPCL HPCL
Source:Companies, Edelweiss research
11 Edelweiss Securities Limited
Oil & Gas
Remote risk of return of regulation on auto fuels Although we do not believe the deregulation regime faces any structural threat per se under the newly elected government, a spate of state elections in 2019 may prompt soft/temporary regulation of auto fuel prices, particularly in case of high oil prices.
Additionally, LPG subsidies to the tune of INR250bn are pending with the central government and are scheduled to be repaid in FY20. Any delay in repayment of these subsidies will aggravate OMCs’ interest burden.
Divestment overhang The government recently announced its intent to sell down combined stake (government + government-owned entities) in public sector enterprises to 51%. This can lead to a potential sell-down of 27%/8% in IOCL/BPCL.
Edelweiss Securities Limited 12 Sector Update
India refiners: Multiple growth levers
Indian refiners are most favourably placed globally amid:
1) Favourable demand-supply: With incremental global demand set to outstrip supply in 2020, we expect the deficit to persist over the early part of next decade, which bodes well for a stable recovery in refining margins. India is particularly well positioned to exploit this trend with demand in the country set to expand at a CAGR of 4.6% over the next five years versus five-year supply CAGR of 2.8%. Naturally, this would keep the market undersupplied beyond 2023E. 2) IMO tailwind: Indian refiners generate highest middle-distillate yields globally (52%) and are, hence, best placed to tap into the surge in diesel cracks as the new IMO norms kick in from 2020. We expect Indian OMCs’ GRMs to jump by USD2.9/bbl by 2020 led by a 46% flare-up in diesel cracks and normalisation of gasoline cracks.
Lever 1: Global demand-supply dynamics (from surplus to deficit) A key reason for the GRM weakness during 2018 is the impending capacity surplus in 2019 (refer to chart 9). We believe that most capacity additions due to come on stream in 2019 are back-ended and, hence, only a minor surplus is likely in 2020. Post-2020, refining capacity additions would slow down considerably, in our view, due to concerns around long- term demand, which should again precipitate a capacity deficit 2021 onwards. (Refinery additions are back ended in 2019; deficit will return from 2021)
Chart 9: Global supply deficit, uptick in diesel cracks due to IMO and normalising gasoline cracks to lift Singapore GRM 3.0 15
12 2.0
9
1.0 Mmb/d
6 US$/bbl
0.0 3
(1.0) 0
2001 2002 2003 2005 2006 2007 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2004 2008
2020E 2021E 2022E 2023E Incremental Demand Incremental Capacity Singapore GRM
Source: BP Review, FGE, Edelweiss research *Year refers to fiscal year (2018 refers to year ending March 2019)
13 Edelweiss Securities Limited
Oil & Gas
The Indian refining market remains in a sweet spot with highest demand growth (4.6% CAGR over 2018–23) among major markets versus supply growth of just 2.8%. Including RIL and Nayara refineries’ export capacities, the market is currently in surplus of close to 40MT (refer to charts 11 and 12). However, given RIL’s and Nayara’s capacities are tailored for exports, we argue that these capacities should be excluded from domestic supply (refer to chart 13). Excluding these, the market turns into a deficit of over 25MT in 2018, which will widen to 30MT by 2022 (refer to chart 10).
Chart 10: Indian market – including export capacity – in surplus 350 60
280 54
210 48 (MMT) 140 42 (MMT)
70 36
0 30
2016 2017 2018 2019
2020E 2021E 2022E 2023E 2024E 2025E Demand Supply Net refining surplus Assuming demand growth of 4.6% CAGR over FY18-23 Source: PPAC, Edelweiss research
Chart 11: Excluding export-dedicated capacities, Indian market turns into a deficit
300 5.0
240 (3.0)
180 (11.0) (MMT) 120 (19.0) (MMT)
60 (27.0)
0 (35.0)
2017 2018 2019 2016
2020E 2021E 2022E 2024E 2025E 2023E
Domestic Demand Domestic Capacity Net refining surplus
Source: PPAC, Edelweiss research Assuming demand growth of 4.6% CAGR over FY18–23E
Edelweiss Securities Limited 14 Sector Update
Chart 12: India needs to ratchet up capacity addition by 150MT over next decade
350 145 330
280 247 62
210 185
(MMT) 140
70
0 Current Less EOU's Net capacity Gap Capacity in capacity 2030
Source: PPAC, Edelweiss research
Chart 13: Indian deficit to widen in spite of capacity coming on stream 20
16
12
8
4
Incremental Demand/Capacity (MT) IncrementalDemand/Capacity 0 2018 2019 2020E 2021E 2022E 2023E
HPCL BPCL IOCL Incremental Demand
Source: Company reports, Edelweiss research
Another interesting development is the increasing focus on capacity additions at JV refineries such as Bhatinda (HPCL) and Bina (BPCL) as well as more complex refineries such as the one at Paradip (IOCL). These refineries boast highest GRMs in the country (USD10–15/bbl) and greater contributions from these refineries will boost overall GRMs across OMCs (refer to table 3).
15 Edelweiss Securities Limited
Oil & Gas
Table 3: Incremental capacity additions of 51MT by 2023 versus requirement of 65MT Upcoming Capital cost Operator Refinery capacity (MT) Commissioning ($/tonne) BPCL Mumbai expansion 2.0 2018 350 HMEL Bhatinda expansion 2.3 2019 280 BORL Bina expansion 1.8 2020 200 HPCL Mumbai expansion 2.0 2020 430 IOCL Koyali expansion 2.7 2020 490 IOCL Mathura expansion 1.2 2020 378 IOCL Haldia expansion 0.5 2020 435 HPCL Vizag expansion 6.7 2021 360 IOCL Barauni expansion 3.0 2021 410 BORL Bina expansion 7.2 2022 415 IOCL Panipat expansion 10.0 2023 369 IOCL Paradip expansion 5.0 2024 398 HPCL Barmer 9.0 2025 667 Cumulative capacity 51.4 399 Source: Company reports, Edelweiss research
Lever 2: Regulatory tailwind from IMO India is in a structural sweet spot—with a healthy demand-supply balance and highest middle-distillate yields globally. Refineries with a higher share of diesel in their product slates along with a greater share of high sulphur crude sourcing stand to gain the most from the upcoming IMO regulation.
With middle-distillate output at over 50% across OMCs (IOC: 55%, BPCL: 55%, HPCL: 47%) and rising Nelson Complexity Index (ability to handle greater complexities) of upcoming refineries (IOCL at Paradip: 12.2; BPCL at Kochi: 10.8; HPCL at Bhatinda: 12), Indian refiners will benefit the most from IMO regulations. Additionally, widening AL-AH spreads due to lower demand for heavier grades of crude (lower FO demand) will benefit Indian refiners the most with high heavy crude sourcing. (refer to charts 14 and 15).
Edelweiss Securities Limited 16 Sector Update
Chart 14: India, with the highest middle-distillate yields globally, stands to gain most from IMO regulation
4.5% The sweet spot: High middle Africa, 22% distillate yield and healthy demand- 3.6% supply balance
Middle East, 40% India 2.7% 51%
1.8%
China, 48% Capacity Growth (%) Growth Capacity
0.9% Europe, 47% Latam, 20%
USA, 39% 0.0% -3% 0% 3% 5% 8%
Demand Growth (%) *Bubble size indicates middle distillate yield, Source: BP Review, IEA, Edelweiss research
Chart 15: Among Indian refiners, IOCL and BPCL boast highest middle-distillate yields
80.0 Indian refiners lie at the top end of the spectrum with high distillate yield and greater flexibility on crude sourcing PTT 64.0 IOCL Repsol S-Oil BPCL SK Energy 48.0 Total HPCL Sinopec Exxon Mobil Shell Reliance 32.0 Andeavor
Marathon Middle Distillate Distillate Middle Yield (%) 16.0 Aramco PetroChina Refining Capacity
0.0 0 3 6 9 12 15
Nelson Complexity Index Source: BP Review, Company reports, ENI, Edelweiss research
Although not perfectly correlated, refineries with higher distillate yields (as defined by high-margin products such as gasoline, diesel, jet fuel, and kerosene-fuel losses) generally generate higher GRMs (refer to table 4). The JV OMC refineries such as Bhatinda (HPCL) and Bina (BPCL) boast highest GRMs in the country led by their superior product slate. Even
17 Edelweiss Securities Limited
Oil & Gas
adjusted for excise benefits, NRL (IOCL subsidiary refinery located in Assam) has a GRM of USD11-plus/bbl with the highest distillate yield in the country (refer to chart 16). This trend is noticeable across northeastern refineries.
Older refineries such as MRPL, CPCL, IOCL (Haldia), and HPCL (Mumbai) have among the lowest GRMs as they are more geared towards heavier distillates. IOCL’s refinery at Paradip, despite being new, has relatively lower GRM due to higher fuel losses and sub-optimal heavy crude sourcing. That said, as the refinery ramps up, we expect its product slate to improve and fuel losses to decline.
Chart 16: Generally, higher the distillate yield, higher the GRM
The sweet spot: High distillate, High GRM 12.6 HMEL, Bhatinda RIL, Jamnagar NRL, Numaligarh BORL, Bina 10.7
IOC, Koyali
EOL, Vadinar
8.8 HPCL, Mumbai GRM, $/bblGRM, IOC, Digbol MRPL, Mangalore IOC, Panipat IOC, Mathura IOC, Haldia IOC, Guwahati BPCL, Mumbai 6.9 IOC, Paradip IOC, Barauni HPCL, Vishak CPCL BPCL, Kochi IOC, Bongaigaon 5.0 40.0 45.0 50.0 55.0 60.0 65.0 70.0 75.0 80.0 85.0 90.0 Distillate yield (%) Source: MoPNG, Edelweiss research
We expect benchmark refining margins (Singapore GRM) to surge by USD2.9/bbl by 2020 led by a 46% rise in diesel cracks due to the IMO regulation along with a recovery in gasoline cracks from the historically low base seen in 2018. The rise in diesel cracks is partly offset by a decline in fuel oil cracks as demand for fuel oil is replaced by diesel.
Based on current product slates, we estimate GRMs would jump 56%/69%/65% for HPCL/BPCL/ IOCL by FY21E. BPCL is likely to log the steepest increase in GRM due to highest share of diesel in product slate while the Kochi refinery’s GRM particularly would continue to improve (refer to tables 5, 6 and 7). Higher propylene yield, excise tax benefits for northeastern refineries and lower fuel losses than BPCL would help IOCL maintain the highest GRM of USD8.9/bbl (HPCL: USD7.8/bbl, BPCL: USD7.8/bbl) (refer to chart 17).
We are also witnessing significant efforts across OMCs to eliminate heavy distillates. Their management teams have indicated that the share of heavy-distillate yields (low-margin products) will thin out by FY22/23 and would be replaced by light/middle-distillates (higher- margin) at refineries.
Edelweiss Securities Limited 18 Sector Update
Table 4: Singapore GRM likely to surge 57% by 2020 led by 46% spike in diesel cracks Product Slate % US$/bbl CY 2017 CY 2018 CY 2019E CY 2020E CY 2021E CY 2022E CY 2023E 19.5 Gasoline 12.0 6.3 10.0 14.0 12.0 11.0 10.0 37.4 Diesel 13.2 14.4 16.0 21.0 19.0 18.0 17.0 15.6 HSFO (5.4) (4.2) (12.0) (27.0) (25.0) (22.0) (21.0) 13.5 Jet/Kero 13.3 14.9 15.0 16.0 15.0 14.0 14.0 4.1 LPG (25.2) (23.8) (22.0) (19.0) (20.0) (20.0) (21.0) 6.5 Naphtha 0.2 (3.9) 0.1 0.2 0.1 0.0 0.0 Singapore GRM 7.2 4.9 7.2 7.8 6.8 6.5 6.1 Source: FGE, Reuters, Edelweiss research Note: The table above refers to calendar year end, whereas OMCs have a fiscal year ending March.
Table 5: BPCL GRM: Likely to jump 69% augmented by declining fuel losses at Kochi Product Slate % Product (New, from CY 2021) Slate % US$/bbl CY 2017 CY 2018 CY 2019E CY 2020E CY 2021E CY 2022E CY 2023E 20.0 17.2 Gasoline 12.0 6.3 10.0 14.0 12.0 11.0 10.0 50.3 48.2 Diesel 13.2 14.4 16.0 21.0 19.0 18.0 17.0 0.0 3.9 HSFO (5.4) (4.2) (12.0) (27.0) (25.0) (22.0) (21.0) 6.8 6.8 Jet/Kero 13.3 14.9 15.0 16.0 15.0 14.0 14.0 5.0 5.0 LPG (25.2) (23.8) (22.0) (19.0) (20.0) (20.0) (21.0) 5.2 5.2 Naphtha 0.2 (3.9) 0.1 0.2 0.1 0.0 0.0 BPCL 6.9 4.6 7.2 7.8 7.3 7.5 7.7 Source: FGE, Reuters, Edelweiss research Note: The table above refers to calendar year end, whereas OMCs have a fiscal year ending March.
Table 6: HPCL GRM: Likely to jump 56%, may surprise with earlier-than-expected improvement in product slate Product Slate % Product (New, from CY 2021) Slate % US$/bbl CY 2017 CY 2018 CY 2019E CY 2020E CY 2021E CY 2022E CY 2023E 20.3 18.3 Gasoline 12.0 6.3 10.0 14.0 12.0 11.0 10.0 46.1 41.1 Diesel 13.2 14.4 16.0 21.0 19.0 18.0 17.0 2.7 9.7 HSFO (5.4) (4.2) (12.0) (27.0) (25.0) (22.0) (21.0) 5.4 5.4 Jet/Kero 13.3 14.9 15.0 16.0 15.0 14.0 14.0 4.6 4.6 LPG (25.2) (23.8) (22.0) (19.0) (20.0) (20.0) (21.0) 3.4 3.4 Naphtha 0.2 (3.9) 0.1 0.2 0.1 0.0 0.0 HPCL 7.4 5.0 7.2 7.8 7.5 7.7 7.8 Source: FGE, Reuters, Edelweiss research Note: The table above refers to calendar year end, whereas OMCs have a fiscal year ending March.
Table 7: IOCL GRM: Likely to jump 65% by FY21E Product Slate % Product (New, from CY 2021) Slate % US$/bbl CY 2017 CY 2018 CY 2019E CY 2020E CY 2021E CY 2022E CY 2023E 18.7 14.7 Gasoline 12.0 6.3 10.0 14.0 12.0 11.0 10.0 50.0 45.7 Diesel 13.2 14.4 16.0 21.0 19.0 18.0 17.0 0.0 4.2 HSFO (5.4) (4.2) (12.0) (27.0) (25.0) (22.0) (21.0) 9.2 9.2 Jet/Kero 13.3 14.9 15.0 16.0 15.0 14.0 14.0 4.6 4.6 LPG (25.2) (23.8) (22.0) (19.0) (20.0) (20.0) (21.0) 5.7 5.7 Naphtha 0.2 (3.9) 0.1 0.2 0.1 0.0 0.0 IOCL 8.5 5.4 8.3 8.9 8.7 8.8 8.9 Source: FGE, Reuters, Edelweiss research
19 Edelweiss Securities Limited
Oil & Gas
Chart 17: GRMs: IOCL leads; BPCL’s and HPCL’s likely to converge 12.0
9.6
7.2
4.8 GRM ( $/bbl) ( GRM
2.4
0.0
FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19
FY20E FY21E IOCL BPCL HPCL Source: FGE, Reuters, Edelweiss research
Based on our sensitivity analysis, IOCL and BPCL tend to have a similar refining beta of 0.8 (defined as % change in EBITDA to a 1% change in GRM) while HPCL has a lower refining beta of 0.7 (refer to charts 18 and table 8). This is primarily due to a higher exposure to refining at IOCL (FY21E: revenue share at 35%, EBITDA share at 50%) and BPCL (revenue share: 29%, EBITDA share: 54%) versus HPCL (revenue share: 20%, EBITDA share: 33%).
Consequently, both IOCL and BPCL outclass HPCL in our pecking order on refining betas given their potentially larger earnings upside due to stronger GRMs (refer to charts 19, 20 and tables 9 and 10).
Chart 18: IOCL: Refining revenue share to rise to 35% by FY21 Table 8: IOCL earnings equally sensitive to GRMs, marketing margins 100% GRM Change 80% % Change in EBITDA -20% -10% 0% 10% 20% 60% -20% (43.8) (35.9) (28.0) (20.1) (12.2) -10% (25.8) (17.9) (10.0) (2.1) 5.8 40% Marketing margin 0.0% (15.8) (7.9) - 7.9 15.8
Revenue(%) share change 20% 10% (5.8) 2.1 10.0 17.9 25.8 20% 16.2 24.1 32.0 39.9 47.8
0%
FY15 FY14 FY16 FY17 FY18 FY19
FY20E FY21E
Refining Marketing Pipelines Petchem
Source: Company reports, Edelweiss research
Edelweiss Securities Limited 20 Sector Update
Chart 19: BPCL: Lower refining share of 29% Table 9: BPCL: Earnings more sensitive to marketing margins 100% GRM Change % Change 80% in EBITDA -20% -10% 0% 10% 20% -20% (47.1) (38.9) (30.7) (22.5) (14.2) 60% Marketing -10% (31.8) (23.6) (15.3) (7.1) 1.1 40% margin 0.0% (16.4) (8.2) - 8.2 16.4 change
Revenue Share (%) RevenueShare 20% 10% (1.1) 7.1 15.3 23.6 31.8 20% 14.2 22.5 30.7 38.9 47.1
0%
FY18 FY14 FY15 FY16 FY17 FY19
FY20E FY21E Refining Marketing Pipelines Source: Company reports, Edelweiss research
Chart 20: HPCL: Share at 17% lowest among OMCs Table 10: HPCL: Earnings more sensitive to marketing margins as well
100% GRM Change % Change 80% in EBITDA -20% -10% 0% 10% 20% -20% (39.6) (33.8) (27.9) (22.1) (16.3) 60% Marketing -10% (25.6) (19.8) (14.0) (8.1) (2.3) margin 40% 0% (11.6) (5.8) - 5.8 11.6 change 10% 2.3 8.1 14.0 19.8 25.6 Revenue Share (%) RevenueShare 20% 20% 16.3 22.1 27.9 33.8 39.6
0%
FY16 FY18 FY14 FY15 FY17 FY19
FY20E FY21E Refining Marketing Pipelines Source: Company reports, Edelweiss research
Refining EBITDA tanked across OMCs by 70% in FY19 as GRMs cracked, but we expect the weakness in light-distillate cracks to abate in FY20. This coupled with stronger diesel cracks in anticipation of the upcoming IMO regulation would drive a recovery in GRMs from FY20, leading to an EBITDA CAGR of 50–60% over FY19–21. In fact, refining EBITDA margin is expected to double over FY19–21 across OMCs while the share of refining in overall EBITDA would increase sharply too.
Among OMCs, IOCL would have the least exposure to refining and marketing (50%/23% as % of overall EBITDA) due to its petchem business, which is expected to generate EBITDA of 17% by FY21 (refer to charts 21 and 22). For BPCL, the share of refining would rise to 54% in FY21 (FY19: 30%) as GRMs are likely to hit all-time highs (refer to charts 25 and 26). Similarly, at HPCL, higher GRMs would alter the refining/marketing split to 33%/60% by FY21E (17%/75% in FY19). (Refer to charts 23 and 24).
21 Edelweiss Securities Limited
Oil & Gas
Chart 21: IOCL: Refining EBITDA CAGR of 62% over FY19–21E Chart 22: IOCL: Refining EBITDA share rises to 50% by FY21E 250 13.0 100%
190 10.0 80% 60% 130 7.0 40%
70 4.0 20% EBITDA Share (%) Share EBITDA EBITDA margin (%) margin EBITDA 0% Refining EBITDA (INR Bn) (INR EBITDA Refining 10 1.0 -20%
(50) (2.0)
FY14 FY15 FY16 FY17 FY18 FY19
FY20E FY21E
FY15 FY19 FY14 FY16 FY17 FY18
FY20E FY21E EBITDA (INR Mn) EBITDA Margin Refining Marketing Pipelines Petchem Chart 23: HPCL: Refining EBITDA CAGR of 52% through FY21E Chart 24: HPCL: Share of refining to rise to 33% by FY21E 90 10.0% 100%
72 8.0% 80%
54 6.0% 60%
36 4.0%
40%
EBITDA margin (%) margin EBITDA EBITDA share (%) share EBITDA
Refining EBITDA (INR Bn) (INR EBITDA Refining 18 2.0% 20% 0 0.0%
0%
FY14 FY15 FY16 FY17 FY18 FY19 FY21E FY20E FY14 FY15 FY16 FY17 FY18 FY19 FY20EFY21E EBITDA (INR Mn) EBITDA Margin (RHS) Refining Pipelines Marketing Chart 25: BPCL: Refining EBITDA CAGR of 53% through FY21E Chart 26: BPCL: Share of refining to rise to 54% by FY21E
100 0.1 100%
84 0.1 80%
68 0.1 60%
52 0.0
40% EBITDA margin (%) margin EBITDA
36 0.0 (%) Share EBITDA
Refining EBITDA (INR Bn) (INR EBITDA Refining 20% 20 0.0
0%
FY18 FY14 FY15 FY16 FY17 FY19 FY21E FY20E FY14 FY15 FY16 FY17 FY18 FY19 FY20EFY21E
EBITDA (INR Mn) EBITDA Margin Refining Marketing Pipelines Source: Company reports, Edelweiss research
Edelweiss Securities Limited 22 Sector Update
Recent and upcoming Indian refineries: Competitive edge Incremental domestic capacities are significantly more competitive than the wave of capacities coming up globally (refer to chart 27). Indian capacities have a head-start given their 25% lower capital cost than global capacities (refer to charts 28, 29 and 30).
Chart 27: Recent Indian refining capacity among most competitive globally 750 20.0
600 16.0
450 12.0 (%)
(USD/t) 300 8.0
150 4.0
0 0.0
Iraq
UAE
India
China
Qatar
Africa
Kuwait
Vietnam
Indonesia
Saudi Arabia Saudi South AmericaSouth Capital cost (adj. for inflation) % of upcoming capacity (RHS)
Source: Crisil, Companies, Edelweiss research
Chart 28: India (recent capacity) 26% more competitive than global average 75.0
50.0
25.0 (%) 0.0
(25.0)
(50.0)
Iraq
UAE
India
China
Qatar
Africa
Saudi
Arabia
Kuwait
South
Vietnam
America Indonesia Fixed cost competitiveness
Source: Crisil, Companies, Edelweiss research
23 Edelweiss Securities Limited
Oil & Gas
Chart 29: India’s recent refining capital cost (average of USD399/t) 700
BPCL Kochi 560 HPCL Bhatinda IOCL Paradip expansion (6) (9) (15) 420 BPCL Mumbai expansion (2) HPCL Bhatinda 280 expansion (2.3) NOCL BPCL Bina (6) Capital cost (USD/t ) Cuddalore (6) 140 BPCL Bina expansion (1.8) 0 2008 2010 2012 2014 2016 2018 2020 2022
Source: Crisil, Companies, Edelweiss research Note: Size of the bubble and value in brackets represents quantum of capacity additions
Chart 30: Indian refining capacity dominates operating cost curve 7.0
5.8
4.6
3.4 (USD / bbl) / (USD 2.2
1.0
IOCL
BPCL
HPCL
BORL
HMEL
Thai Oil Thai
Reliance
Valero (US) Valero
Tesoro(US) Marathon (US) Marathon Neste (Finland) Neste Source: IEA, Companies, Edelweiss research
Petchem diversification capping refining capacity additions Another reason for the shortfall in Indian refining capacity over the next five years is the divergence of capex towards chemicals. OMCs, in order to diversify exposure to oil products amid the uptrend in electrification, are venturing into petrochemicals.
While only IOCL operates a petrochemical plant (5MT capacity at Panipat) at present, other OMCs too are in the process of setting up theirs—IOCL is setting up a new 2MT aromatics/polypropylene plant at Paradip; HPCL will start its petchem plant at Bhatinda (1MT) by FY23 and BPCL is setting up greenfield capacity (2MT each) at Kochi and Mumbai (refer to chart 31).
Edelweiss Securities Limited 24 Sector Update
Consequently, we expect petchem to account for over 23% of incremental capex over the next five years. On average, we estimate the annual capex would rise from INR262bn during FY14–18 to INR598bn over FY19–23E (refer to chart 32).
Chart 31: OMCs’ five-year capex to be spread across verticals Gas 7%
Refining Petchem 34% 23%
E&P 11% Pipelines Marketing 5% 20% Source: Companies, Edelweiss research
Chart 32: Increase in average capex spend across companies 750 598 600
450
275 262 (INR Bn) (INR 300 163 161 132 150 79 51 0 IOC BPCL HPCL Aggregate
FY14-18 FY19-23
Source: Companies, Edelweiss research
While we do expect RoCE to come under pressure in the near term given the long-gestation periods typically associated with petchem projects, we do advise investors to look beyond our forecast period. Petchem projects typically tend to generate 1.5x returns that of refining projects and are RoCE-accretive for OMCs. Capex being undertaken for refinery upgradation will lead to structurally higher GRMs in the long term.
25 Edelweiss Securities Limited
Oil & Gas
India marketing: Stable margins
We believe that OMCs’ business models are far more resilient than what markets perceive. The three well-entrenched OMCs essentially make an oligopoly that is shielded by significant entry barriers. 1) Receding regulatory pressure post-elections: The short-term pressure on marketing margins (re-regulation) is on the wane post-elections with pricing freedom returning to OMCs. 2) Long-term gross margins likely to stabilise within INR3– 4/litre: We demonstrate that new players need to earn gross margins in excess of INR3/litre to earn a reasonable 15% IRR. This provides a margin floor to the incumbents.
We believe that OMCs’ business models are far more resilient than what markets perceive. The three well-entrenched OMCs essentially make an oligopoly that is shielded by significant entry barriers. To illustrate, even behemoth Reliance, which has disrupted nearly every business it entered, failed to make meaningful inroads into fuel marketing.
As a result, barring a scenario wherein high oil prices coincide with an election year, OMCs generally make a normalised gross marketing margin of INR3–4/litre (refer to chart 33). We understand that regulatory supervision tends to increase only in election years and only if oil prices climb above a certain threshold (~USD80/bbl as seen during 2018).
While OMCs derive a relatively similar share of earnings from marketing and refining (FY21E: IOC: 23%, BPCL: 43% and HPCL: 62%), their stock prices are overly dependent on the fortune of marketing margins. As a result, post-deregulation, share prices took off as marketing margins surged; since the recent announcement on subsidy-sharing for OMCs, their stock prices plunged. The INR1/litre cut in prices to be borne by OMCs largely wiped out their retail marketing earnings. Pre-election years have always proven to be difficult for OMCs as the government generally intercedes to protect consumers from elevated oil prices.
Edelweiss Securities Limited 26 Sector Update
Chart 33: Share prices and marketing margins always take a hit in a pre-election year but recover thereafter 1,170 293
Generally, OMC stocks have underperformed the Pre election year 952 index in a pre-election year, while the 241 outperformance has been signficant post elections
734 190
515 138
(Jan 2007: 100)(Jan Indexed Brent PriceIndexed Brent
Indexed share performance Indexed share 297 87
79 35
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
BPCL HPCL IOCL NIFTY Brent (RHS)
Source: Bloomberg, Edelweiss research
Margin recovery sooner than expected Lower oil prices have been a boon for OMCs; although, we expected a recovery in marketing margins post-elections despite higher oil prices, lower oil prices advanced the normalisation of marketing margins. In fact, gross marketing margins had spiked to as high as INR6/litre as OMCs recouped the losses incurred in the weeks following the INR1/litre cut in margins (refer to chart 34).
Chart 34: Rebound in marketing margins led to recovery in share prices 100 7.0 Lower oil prices have been a boon for OMC's with higher marketing margins 89 reflecting in a share price revival 4.0
78 1.0
67 $80/bbl oil price (2.0) scenario culminating in
beginning) a INR1/ltr hit led to a 56 collapse in marketing (5.0) margins and share prices
45 (8.0) (INR/ltr) margin marketing Net
Share Price (Indexed to 100 at the at 100 to SharePrice (Indexed
Jul/18 Jul/19
Jan/18 Jan/19
Sep/18
Nov/18
Mar/18 Mar/19
May/19 May/18 PSR Average Marketing margin (Petrol) Marketing margin (Diesel)
Source: Reuters, Edelweiss research
27 Edelweiss Securities Limited
Oil & Gas
Although regulatory interventions tend to depress margins in the short term, they tend to revert to normalised levels as oil prices decline. When oil prices fall, OMCs do not completely pass on the benefits of declining prices in order to normalise margins. From October 5 to 31 December, 2018, although FOB petrol/diesel prices had declined by 44%/40%, pump price was just 16%/14% lower (refer to charts 35 and 36). This implies OMCs pocketed a greater share of the decline (26%/21% for petrol/diesel), which lifted marketing margins (31 December petrol/diesel: INR5.5/INR3.1/litre; 8 October: INR0.7/1/litre).
Chart 35: FOB prices had contracted far more than local prices Chart 36: Differential expanded by INR 6.1/8.5 per litre for MS/HSD since regulatory hit 180 50
Differential expands due to 17
- incomplete pass-through of 160 45 lower fuel prices 140 40
120 Differential contracts post 35 INR2.5/ltr cut in prices
100 (INR/ltr) Prices Indexed to SepPrices to Indexed 80 30
25
Jul/18 Jul/19
Jan/18 Jan/19
Sep/17 Sep/18
Nov/17 Nov/18
Mar/19 Mar/18
May/18 May/19
17 18 18 19
18
19 18
18 19
19 18
- - - -
-
- -
- -
- - Jul
Petrol price (Rs/ltr) Diesel Price (Rs/ltr) Jul
Jan Jan
Sep
Nov Nov
Mar Mar
May May Gasoline Price (INR/ltr) Gasoil Price (INR/ltr) Petrol Differential Diesel Differential Source: PPAC, Edelweiss research
Marketing margins typically tend to come under pressure before elections. Diesel net marketing margin (gross margin-marketing costs) before Gujarat and Karnataka elections had fallen to -INR0.4/litre compared with an average margin of INR1.1/litre since de- regulation (refer to chart 38). However, due to sharp price hikes post-elections, average margins had surged to INR1/litre over the next one month. Again, during October 2018, the government asked OMCs to share the burden of rising oil prices and take a hit of INR1/litre on marketing margins.
As a result, marketing margin plunged to –INR0.9/litre in the week following the announcement. Although lower oil prices did help a recovery in marketing margins till Q4FY19, they again plunged in the weeks leading up to central elections in May 2019 (refer to chart 37). However, margins have since recovered in June, and we expect them to continue to rise towards the targeted INR3–4/litre (refer to chart 39).
Edelweiss Securities Limited 28 Sector Update
Chart 37: Marketing margins highly susceptible to regulatory intervention around elections
8.0
Central elections 5.0 Karnataka elections Re-regulation Gujarat elections
2.0
(INR/ltr) (1.0)
(4.0)
(7.0)
18 17
18
17 18
18 19
17 18
19 18
18 18 17 18 19 19
19 18
19 18
18 19
- -
- - -
- -
- -
- -
------
- -
- -
- -
Jul Jul
Jan Jan
Jun Jun
Oct Oct
Apr Apr
Sep Sep Feb Feb
Dec Dec
Aug
Nov Nov
Mar Mar
May May
Diesel Petrol
Source: PPAC, Edelweiss research
Chart 38: We expect margins to decline in FY20… Chart 39: …offsetting higher volumes, implying muted growth
6.0 500
4.8 400
3.6 300 2.4 200 1.2
Marketing margin (INR/ltr) margin Marketing 100
0.0 bn) (INR margin Marketing Gross
0
FY14 FY08 FY09 FY10 FY11 FY12 FY13 FY15 FY16 FY17 FY18 FY19
FY20E FY21E
FY19 FY14 FY15 FY16 FY17 FY18
FY20E FY21E IOCL BPCL HPCL IOCL BPCL HPCL Source: Companies, Edelweiss research
IOCL tends to have highest margins among OMCs despite its lowest portion of auto fuels by volume as it is able to meet its entire marketing volumes through internal production from captive refineries. BPCL and HPCL, despite a higher share of auto fuels tend to have lower margins due to external purchases, which are bought at a premium to internal production. (refer to chart 40).
29 Edelweiss Securities Limited
Oil & Gas
Chart 40: IOCL: Highest margins due to internal purchases 4.5 100%
4.0 80%
3.5 60%
(INR/ltr) 3.0 40%
2.5 20% (%) sharefuelAuto
2.0 0% IOCL BPCL HPCL
Marketing margin (FY18) Auto fuel share Source: PPAC, Edelweiss research
Deregulation since 2012 positive for OMCs Since petrol prices were freed in 2012 and diesel prices in 2016, OMCs’ average gross retail margins on petrol/diesel have increased by 65% to INR3/litre, as they exploited falling oil prices while the government significantly raised excise duties on both diesel and petrol (refer to chart 41). FY19 margins have surprised positively in spite of the regulatory intervention in October and have, in fact, come in higher than long-term targets. We expect these margins to sustain over the long term.
Chart 41: Marketing margins up 65% since deregulation; now at long-term average 5.0
4.0
3.0
2.0
1.0 Marketing margin (INR/ltr) margin Marketing
0.0 Prior to deregulation FY19 margin Normalised margin (post deregulation) Source: Edelweiss research
Edelweiss Securities Limited 30 Sector Update
OMCs’ market share unscathed The private share of auto fuel retail sales has remained stagnant at 9.5% for the past few years owing to stiff competition from OMCs. Although up from next to zero in FY14, we believe market share has plateaued as underpenetrated areas have been covered; private players are now running into stiff resistance as they venture into areas with significant OMC concentration.
We believe that new entrants face daunting entry barriers as OMCs are well entrenched with a wide distribution network; any attempt to dislodge them would require a pricing war that would be a costly and drawn-out affair. As a result, even the largest petchem company in India (Reliance), which has a history of disrupting several industries, failed to make inroads into this segment (refer to chart 42).
Although overall private share of petroleum product sales is higher at 24%, this is mainly due to imports of ATF, petcoke, lubricants and other industrial products, which tend to be imported directly by the end-user industry. Industrial product margins tend to be much lower than auto fuels; hence, this is a low-priority segment for OMCs (refer to chart 43).
Chart 42: Private share of auto fuel sales has languished around 9.5% though... 100.0
80.0
60.0 (%) 40.0
20.0
0.0
Q2FY16 Q3FY16 Q4FY16 Q1FY17 Q2FY17 Q3FY17 Q4FY17 Q1FY18 Q2FY18 Q3FY18 Q4FY18 Q1FY19 Q2FY19 Q3FY19 Q4FY19 Q1FY20 Q4FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16
IOCL BPCL HPCL Private
Source: PPAC, Edelweiss research
31 Edelweiss Securities Limited
Oil & Gas
Chart 43: …private share of petroleum product sales has doubled since 2014 to 24%
100.0
80.0
60.0 (%) 40.0
20.0
0.0
Q4FY14 Q1FY15 Q2FY15 Q4FY15 Q1FY16 Q2FY16 Q3FY16 Q1FY17 Q3FY17 Q4FY17 Q1FY18 Q2FY18 Q4FY18 Q1FY19 Q2FY19 Q3FY19 Q1FY20 Q3FY15 Q4FY16 Q2FY17 Q3FY18 Q4FY19
IOCL BPCL HPCL Private
Source: PPAC, Edelweiss research
OMCs generate decent returns on capital from marketing outlets The economics of a retail outlet (for both a dealer and the oil company) depend on the model of operation (company-owned-and-operated, dealer-owned-and-operated, etc). For a simple analysis, we have assumed a dealer-owned dealer-operated (DODO) model, which is most prevalent.
IRR-based viability analysis of a DODO outlet—by oil company and dealer
We have analysed IRRs for a fuel retail dealer and oil marketing company.
1. Oil marketing company: Key drivers for economics of a servicing fuel outlet are: 1) Net marketing margin (INR/litre) of petrol and diesel; 2) throughput per outlet (TPO; sales/month); and 3) initial investment required.
2. Fuel retail dealer: Key drivers for economics of operating an outlet are: 1) Dealer commission; 2) cost of setting up the outlet (real estate prices); 3) Operating cost and the 4) Throughput of the outlet (refer to table 11).
In our base case scenario:
OMC earns 15% IRR: Assuming a net marketing margin of INR1.5/litre (gross margin of INR3/litre), INR15mn as the initial set-up cost and TPO of 185kl/month.
DODO dealer earns 12% IRR: Assuming dealer commission of INR3.6/litre for petrol, INR2.5/litre for diesel, an investment of INR20mn, annual operating expense of INR3mn and TPO of 185kl/month.
Edelweiss Securities Limited 32 Sector Update
Table 11: IRR analysis: OMC earns 15% IRR, dealer 12% Particular Amount Cost of setting up the retail outlet for the Dealer INR mn 20.0 Initiail investment for oil marketing company INR mn 15.0 Gross throughput per outlet per month Tonne 150.0 Throughput per month kl/month 184.8 Gross marketing margin on petrol INR/litre 3.0 Gross marketing margin on diesel INR/litre 3.0 Net marketing margin INR/litre 1.5 Marketing cost 1.5 Dealer commission- Petrol INR/litre 3.6 Dealer commission- Diesel INR/litre 2.5 Operating expense INR mn 3.0 Cost of equity % 16.0 Cost of debt % 10.0 Post-tax cost of debt % 6.6 Debt/Capital financing % 40.0 WACC % 12.2 Project IRR for oil marketing company % 14.7 Project IRR for Dealer % 12.3 Source: Edelweiss research * Figures in Red are assumptions Oil product demand recovery imminent We have seen a recovery in 2019 oil product sales from the low of -1.7% YoY growth in November. HSD sales, which account for over 40% of overall sales, have rebounded, up 1% YoY in June versus 5.5% YoY contraction in November (refer to charts 44 and 45).
The slowdown in oil product demand growth is primarily attributable to the sharp decline in petcoke and FO usage while LPG consumption has also slowed considerably due to peak penetration (refer to charts 46 and 47). We expect oil demand to remain stable at 5% for FY20/21E, slightly higher than 4.2% growth in FY19.
Chart 44: Petrol sales: Rebound from lows in September 2018 Chart 45: HSD sales: Recover from November 2018-low 3.0 20% 9.0 20%
2.4 15% 7.2 13%
1.8 10% 5.4 6% (%)
1.2 5% (%) 3.6 -1%
(MMTPA) (MMTPA) 0.6 0% 1.8 -8%
0.0 -5% 0.0 -15%
17 18 19
17 18 19
17 18 19
17 18
17 17 18 18
17 18 19
17 18 19
- - -
19 17 18
17 18
- - -
17 18
18 17
- - -
- -
- -
- -
- - -
- - -
- - -
- -
- -
- -
Jun Jun Jun
Oct Oct
Apr Apr Apr
Feb Feb Feb
Dec Dec
Aug Aug
Jun Jun Jun
Oct Oct
Apr Apr Apr
Feb Feb Feb
Dec Dec
Aug Aug MS Demand Growth HSD Demand growth
Source: PPAC, Edelweiss research
33 Edelweiss Securities Limited
Oil & Gas
Chart 46: PP demand recovers along with diesel Chart 47: PP long-term demand growth at 5%
20.3 12% 300 12%
15.8 8% 240 10%
11.3 4% 180 7%
(%) (%)
6.8 0% (MMT)
(MMTPA) 120 5%
2.3 -4%
60 2%
18 17 19
17 18 19
17 18 19
17 18
17 18 18
(2.2) 17 -8%
- - -
- - -
- - -
- -
- - -
- 0 0%
Jun Jun Jun
Oct Oct
Apr Apr Apr
Feb Feb Feb
Dec Dec
Aug Aug
FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23 PP Demand Demand growth Petroleum Product Demand Demand growth Source: PPAC, Edelweiss research
Edelweiss Securities Limited 34 Sector Update
Valuations: Deep discount
We believe valuations, currently at near multi-year lows, have troughed and are ripe for a re- rating. Although OMCs have rallied 25% from the lows post-regulatory hit on 5 October, 2018, we believe the stock re-rating has several legs of growth still to run: 1) Valuations at multi-year low: OMCs’ valuation at an average 4.8x FY21E EV/EBITDA is much below global peer average despite their superior returns on capital and higher dividend yields. Moreover, valuations are 40% below their own ten-year average, indicating deep value across OMCs. 2) Valuations pricing in negative terminal growth: Current stock prices of IOCL and HPCL imply negative terminal growth while BPCL is factoring in negligible growth. 3) Highest target price on Street: Despite telltale signs of markets taking note of the potential uptick in OMCs’ future earnings, we believe the size of GRM recovery is being underpriced. Our earnings estimates for FY20/FY21 are 10%/16% higher than consensus on average across OMCs. Consequently, our target prices are about 10% higher on average than consensus.
OMCs’ valuation: 26% below peer average We compare OMCs’ valuations with other pure-play Indian refiners and refiners in the US, Europe and APAC. Indian OMCs are trading at marked discounts to every geography despite highest returns on capital and dividend yields across regions. In fact, we estimate IOCL would generate a dividend yield of 7.4% based on its FY20E payout, implying deep value in the stock (refer to charts 48 & 49). We also expect earnings to rebound from the lows seen in FY19 and 12% earnings CAGR on average over FY19–21 (refer to table 12).
Table 12: Indian OMCs trading at marked discounts to global peers despite superior returns on capital and dividend yields Div yield EPS CAGR Mcap Diluted EPS (LC) EV/EBITDA( x) ROCE (%) ROE (%) D/E (x) P/E (x) Company (%) (%) (USD mn) FY19 FY20E FY21E FY19 FY20E FY21E FY19 FY20E FY21E FY21E FY19 FY21E FY20E FY19-21E India OMC Indian Oil Corporation Limited 15,927 18.4 19.8 24.8 5.8 5.2 4.4 10.9 11.3 13.0 18.6 0.7 5.1 7.4 16.0 Bharat Petroleum Corporation Limited 9,938 39.7 41.5 48.0 7.0 6.5 5.7 12.7 11.7 11.4 22.5 0.9 7.1 5.5 10.0 Hindustan Petroleum Corporation Limited 5,085 43.9 42.6 50.6 5.0 5.2 4.3 14.7 12.8 12.9 21.9 0.7 4.7 8.3 7.5 India OMC-Mean 5.9 5.6 4.8 12.8 11.9 12.4 21.0 0.8 5.7 7.1 11.1 India Refining Reliance Industries Limited 112,598 66.8 80.4 96.9 15.5 12.5 10.4 11.0 10.9 11.8 11.0 0.8 17.0 0.6 20.5 Mangalore Refinery & Petrochemicals Ltd 1,437 1.9 4.8 10.4 8.2 8.4 5.7 4.4 3.2 6.5 16.3 1.5 5.5 3.5 131.0 Chennai Petroleum Corp Ltd 420 (13.8) 32.4 51.2 20.1 5.6 4.4 -6.0 10.1 13.5 NA 1.8 3.8 6.6 NA India Refining-Mean 14.6 8.8 6.8 3.1 8.1 10.6 13.6 1.4 8.8 3.6 75.7 US Refining Marathon Petroleum Corp 36,590 5.4 4.5 7.7 9.2 7.6 5.9 5.4 5.4 8.4 13.5 0.6 7.2 3.9 19.8 Phillips 66 46,512 11.9 7.8 10.4 7.6 8.6 7.2 9.9 9.9 8.9 16.7 0.4 9.9 3.4 -6.6 Valero Energy Corp 35,194 7.3 5.8 10.3 5.8 7.6 5.5 8.5 8.5 13.2 18.5 0.4 8.2 4.3 18.9 US Refining-Mean 7.5 7.9 6.2 7.9 7.9 10.2 16.3 0.5 8.4 3.8 10.7 Europe Refining Neste Oyj 26,081 1.0 1.7 1.9 9.7 11.4 10.7 21.3 21.3 20.3 25.3 0.2 16.1 2.9 36.4 Rubis 5,700 2.7 3.2 3.5 10.3 10.1 9.3 8.4 8.4 8.5 13.8 0.6 14.5 3.4 15.1 Dcc Plc 8,295 2.8 3.7 3.9 11.9 11.1 10.8 9.4 8.0 7.7 13.4 0.7 17.6 2.2 17.3 Europe Refining-Mean 10.6 10.9 10.2 13.0 12.6 12.2 17.5 0.5 16.1 2.8 22.9 APAC Refining Vietnam National Petroleum 3,238 2,774 3,139 3,103 9.4 10.4 9.7 11.6 11.6 11.4 18.7 0.6 20.7 3.2 5.8 Petrochina 163,270 0.3 0.3 0.3 3.2 5.0 4.9 3.6 3.6 4.0 5.1 0.3 10.9 4.6 8.6 Sinopec 89,920 0.5 0.5 0.5 3.4 4.7 4.6 7.2 7.2 7.5 8.8 0.2 8.6 8.0 2.0 APAC Refining-Mean 5.4 6.7 6.4 7.5 7.5 7.6 10.8 0.4 13.4 5.3 5.5 Source: Company, Edelweiss research *Global peer group is calendar Y/e versus March Y/e for Indian companies *Consensus estimates for other non coverage companies *LC for Local currency
35 Edelweiss Securities Limited
Oil & Gas
Chart 48: OMCs trading at a discount despite superior RoEs 4.0 Vietnam Neste Oyj 3.2 Petroleum
2.4 Rubis
P/B (x) P/B Reliance BPCL 1.6 Valero Phillips 66 Petrochina HPCL IOCL 0.8 Marathon MRPL Sinopec 0.0 0.0 5.0 10.0 15.0 20.0 25.0 30.0 ROE (%) Source: Company, Edelweiss research
Chart 49: OMCs trading at a discount despite superior RoCEs 12.0 Vietnam Neste Oyj 9.6 Rubis National Reliance Phillips 66 7.2 BPCL Marathon Valero Petrochina MRPL 4.8 HPCL EV/ EBITDA (x)EBITDA EV/ Sinopec IOCL
2.4
0.0 0.0 5.0 10.0 15.0 20.0 25.0 ROCE (%) Source: Company, Edelweiss research
Valuations at deep discount to both consensus and our estimates Based on consensus estimates, valuations (FY21E EV/EBITDA) are 30% below the ten-year average and are trading at least 1.5 standard deviations below the consensus mean. With our earnings estimates about 16% above consensus for FY21, valuations are cheaper still, trading at a 40% discount to the long-term average (refer to chart 50 & 51).
Edelweiss Securities Limited 36 Sector Update
Chart 50: Valuations significantly below long-term averages 12.5 +1SD
10.7 +1SD +1SD 8.9
-1SD 7.1 -1SD EV/ EBITDA (x) EBITDA EV/ -1SD 5.3
3.5 BPCL IOCL HPCL
EV/EBITDA Consensus EV/EBITDA (Edel estimates) 10 year avg
Source: Bloomberg, Edelweiss research
Chart 51: Valuation differential versus Western refiners reversed into 37% discount versus 6% premium in 2011 16.0 Premium has turned into a discount post regulatory interference in 13.0 marketing margins
10.0
7.0 (EV/EBITDA)
4.0 Indian OMC enjoyed a hefty premium due to expectations
1.0
12
10 17
18 11
15
08 15
12 19
10 14 14 17
09 18 11 16
13
-
- - - -
-
- -
- -
- - - -
- -
- -
-
Jul
Jan Jan
Jun Jun
Oct Oct
Apr
Feb Sep
Dec
Aug Aug
Nov Nov
Mar Mar
May May
Western Refining BPCL IOCL HPCL Source: Bloomberg, Edelweiss research
OMCs’ pricing in negative terminal growth At current prices, we estimate that OMCs are pricing in negative terminal growth. (referto chart 52). For calculating this, we use Gordon Growth Model while using FY19 earnings as our base. We assume cost of equity as 12%.
37 Edelweiss Securities Limited
Oil & Gas
Chart 52: Inexpensive valuations: IOCL, HPCL pricing in zero terminal growth
400 365 -4.5% 339 331 0.3% 320 256 240 167 -2.5%
160 132 (INR/share) 80
0
IOCL (CMP)IOCL
BPCL (CMP)BPCL
HPCL (CMP)HPCL
Zerogrowth Zerogrowth Zerogrowth
2.5% Growth 2.5% Growth 4.5%
0.3% Growth 0.3% - - Source: Bloomberg, Edelweiss research
Markets have started pricing in earnings recovery We observe that despite tepid TTM earnings growth in FY15, share prices increased disproportionately led by a significant multiple expansion. Markets had started pricing in earnings recovery in FY16 as diesel prices were completely de-regulated while LPG subsidies reduced sharply due to capping of subsidized LPG cylinders. We see a similar situation playing out in 2018 as multiples have been remarkably steady, holding up share prices despite an earnings decline (refer to chart 53). We believe markets have started pricing in a significant earnings recovery from FY20 although it continues to significantly underestimate the magnitude of recovery (refer to charts 54 and 55). Consensus EPS estimates for FY20/FY21 have held remarkably steady since the sharp cuts seen towards end of 2019.
Chart 53: Multiples hold up in the face of sharp earnings decline 175.0
127.0
79.0 (%) 31.0
(17.0)
(65.0) FY13 FY14 FY15 FY16 FY17 FY18 FY19
Price change % EPS Change % Multiple change %
Source: Bloomberg, Edelweiss research
Edelweiss Securities Limited 38 Sector Update
Chart 54: FY20 consensus EPS slashed by 22–28% across OMCs... Chart 55: ...while FY21E consensus EPS cut by 12–25% 60 60
51 51
42 42
33 33
FY20 EPS (INR/share) EPS FY20 24 FY21 EPS (INR/share) EPS FY21 24
15 15
17 18
18 19
17 18
17 18 18 19
18 19
18
18 19
18 19 18
18 19
18
- -
- -
- -
- -
- -
- -
-
- -
- - -
- -
-
Jul Jul
Jul
Jan Jan
Jan Jan
Sep Sep
Sep
Nov Nov
Mar Mar
Nov
Mar Mar
May May
May May
IOCL BPCL HPCL IOCL BPCL HPCL
Source: Bloomberg, Edelweiss research
Our target prices at the top-end of Street We are raising our target prices across OMCs, which pumps them towards the top end of consensus (refer to charts 56-72). As mentioned in our pecking order, we remain most bullish on IOCL due to its mouth-watering valuation and greatest potential upside from higher middle-distillate cracks (refer to tables 13-16).
Chart 56: Our target prices on OMCs toward top end of consensus range 600
480
360
240 (INR/share)
120
0 HPCL BPCL IOCL
Low-High Mean Current price Target Price
Source: Bloomberg, Edelweiss research
39 Edelweiss Securities Limited
Oil & Gas
Table 13: Revision in estimates IOCL HPCL BPCL Comments FY20E FY21E FY20E FY21E FY20E FY21E EBITDA (new) INR mn 393,192 466,263 109,878 133,561 164,307 185,307 GRMs rise by USD0.5–1.0/bbl EBITDA (old) INR mn 375,090 443,999 96,156 122,190 141,271 170,026 factoring in enhanced % revision 4.8 5.0 14.3 9.3 16.3 9.0 distillate yields PAT (new) INR mn 187,321 233,782 64,944 77,251 81,652 94,356 Higher interest, depreciation PAT (old) INR mn 184,213 228,046 55,623 63,539 71,483 71,370 partly offset higher GRMs % revision 1.7 2.5 16.8 21.6 14.2 32.2 Target price (new) INR 182 348 442 Target price (old) INR 174 225 393 % revision 4.6 54.7 12.5 Source: Edelweiss research
Valuation multiples sag below long-term range
Chart 57: IOCL EV/ EBITDA (x) versus long-term average Chart 58: BPCL EV/ EBITDA (x) versus long-term average 14.0 16.0
11.2 +1SD 13.2 +1SD
8.4 10.4
(x) (x) 5.6 -1SD 7.6 -1SD 2.8 4.8
0.0 2.0
2015 2009 2010 2011 2012 2013 2014 2016 2017 2018
2016 2009 2010 2011 2012 2013 2014 2015 2017 2018 EV/EBITDA 10 year average EV/EBITDA 10 year average
Chart 59: HPCL EV/ EBITDA (x) versus long-term average Chart 60: IOCL PER (x) versus long-term average 16.0 35.0
13.2 +1SD 28.0
10.4
21.0 +1SD (x) 7.6 (x) 14.0
4.8 -1SD 7.0 -1SD 2.0
0.0
2011 2018 2009 2010 2012 2013 2014 2015 2016 2017
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 EV/EBITDA 10 year average PER 10 year average
Source: Bloomberg, Edelweiss research
Edelweiss Securities Limited 40 Sector Update
Chart 61: BPCL PER (x) versus long-term average Chart 62: HPCL PER (x) versus long-term average 30.0 50.0
24.0 40.0 +1SD
18.0 30.0 +1SD
(x) (x) 12.0 20.0
6.0 10.0 -1SD
0.0 0.0 -1SD
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
2010 2014 2009 2011 2012 2013 2015 2016 2017 2018
PER 10 year average PER 10 year average
Chart 63: IOCL P/B (x) versus long-term average Chart 64: BPCL P/B (x) versus long-term average
2.5 4.0
2.0 3.2 +1SD +1SD
1.5 2.4 (x)
1.0 (x) 1.6
0.5 -1SD 0.8 -1SD 0.0
0.0
2012 2013 2014 2015 2009 2010 2011 2016 2017 2018
2015 2017 2009 2010 2011 2012 2013 2014 2016 2018 P/B 10 year average P/B 10 year average
Chart 65: HPCL P/B (x) versus long-term average Chart 66: IOCL dividend yield (x) versus long-term average 3.5 8.0 +1SD 2.8 6.4
2.1 +1SD 4.8
(x) (x) 1.4 3.2
0.7 1.6 -1SD
0.0 -1SD 0.0
2010 2012 2015 2017 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2009 2011 2013 2014 2016 2018 P/B 10 year average DIVIDEND YIELD 10 year average
Source: Bloomberg, Edelweiss research
41 Edelweiss Securities Limited
Oil & Gas
Chart 67: BPCL dividend yield (x) versus long-term average Chart 68: HPCL dividend yield (x) versus long-term average 9.0 12.0
7.2 9.6 +1SD
5.4 7.2
+1SD
(x) (x) 3.6 4.8
1.8 2.4 -1SD -1SD
0.0 0.0
2010 2013 2016 2009 2011 2012 2014 2015 2017 2018
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 DIVIDEND YIELD 10 year average DIVIDEND YIELD 10 year average Source: Bloomberg, Edelweiss research
Chart 69: PER of Indian OMCs versus Western refiners Chart 70: P/B of Indian OMCs versus Western refiners 50.0 5.0
40.0 4.0
30.0 3.0 PER (x) PER 20.0 (x) B P/ 2.0
10.0 1.0
0.0 0.0
15 08 09 10 11 12 13 14 16 17 18
10 17 08 09 11 12 13 14 15 16 18 19
------
------
Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan
Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar
Western Refining BPCL IOCL HPCL Western Refining BPCL IOCL HPCL
Source: Bloomberg, Edelweiss research
Edelweiss Securities Limited 42 Sector Update
Chart 71: EV/ EBITDA of Indian OMCs versus global refinery 16.0 Premium has turned into a discount post regulatory interference in 13.0 marketing margins
10.0
7.0 (EV/EBITDA)
4.0 Indian OMC enjoyed a hefty premium due to expectations
1.0
12
10 17
18 11
15
08 15
12 19
10 14 14 17
09 18 11 16
13
-
- - - -
-
- -
- -
- - - -
- -
- -
-
Jul
Jan Jan
Jun Jun
Oct Oct
Apr
Feb Sep
Dec
Aug Aug
Nov Nov
Mar Mar
May May
Western Refining BPCL IOCL HPCL
Chart 72: Dividend yield of Indian OMCs versus global refinery 10.0
8.0
6.0
4.0
Dividend(%) yield 2.0
0.0
09 16
14
08 15
19 12
12
09 16
11 11 18 14 18
08 15
13
10 17
- -
- - -
- -
-
- -
- - - - -
- -
-
- -
Jul Jul
Jan
Jun
Oct Oct
Apr Apr
Feb Sep Sep Feb
Dec Dec
Aug
Nov
Mar Mar
May May
Global Refinery BPCL IOCL HPCL
Source: Bloomberg, Edelweiss research
43 Edelweiss Securities Limited
Oil & Gas
Table 14: IOCL SoTP Base value Base value Base value (USD bn) (INR bn) (INR/share) IOCL refining (@ EV/EBITDA 5.5x) 14.7 991 106 IOCL marketing (@ EV/EBITDA 4x) 4.8 323 34 IOCL pipelines (@ EV/EBITDA 5.5x) 5.6 379 40 IOCL chemicals (@ EV/EBITDA 6x) 6.3 425 45 Enterprise value of operating assets 31.4 2,118 226 Value of CPCL 0.9 62 7 Investments at 30% discount 3.9 260 28 Net debt 7.1 479 51 Equity value 25.2 1701 182 Source: Edelweiss research
Table 15: HPCL SoTP Base value Base value Base value Particulars (USD bn) (INR bn) (INR/share) HPCL refining (@ EV/EBITDA 5.5x) 3.9 256 168 HPCL marketing (@ EV/EBITDA 4x) 5.2 336 220 HPCL pipelines (@ EV/EBITDA 5.5x) 0.9 61 40 EV of HMEL refinery 49% stake 2.3 153 100 Enterprise value of operating assets 12.4 806 528 Investment value after 30% discount 0.2 16 10 Net debt 4.2 275 180 Equity value 8.2 531 348 Source: Edelweiss research
Table 16: BPCL SoTP Base value Base value Base value Particulars (USD bn) (INR bn) (INR/share BPCL standalone refining (@ EV/EBITDA 5.5x) 6.5 434 221) Equity value of Bina refinery (@ EV/EBITDA 6.5x) 0.3 21 11 BPCL marketing (@ EV/EBITDA 4x) 3.3 220 112 BPCL pipelines (@ EV/EBITDA 5.5x) 0.5 34 17 NRL (@ EV/EBITDA 6.5x) 2.0 131 67 Mozambique (@ DCF, 10% stake) 2.5 168 85 EV of operating assets 15.2 1,019 518 Non-current investments at 30% discount 2.9 193 98 Net debt 2.2 150 76 Equity value 13.0 869 442 Source: Edelweiss research
Edelweiss Securities Limited 44 Sector Update
IOCL stands out on financial metrics Historically, HPCL has logged the highest RoCE among OMCs followed by BPCL and IOCL. This is attributable to the higher share of marketing earnings at HPCL and BPCL, which tends to be asset-light.
Going forward, we expect BPCL’s and HPCL’s RoCE to decline given the uptick in capex; investments have fairly long gestation with returns expected only after four–five years (refer to table 17). That said, we expect IOCL’s RoCE to improve given the lowest increase in capex among OMCs.
Table 17: HPCL, IOCL to record highest increase in throughput FY19-23 FY16 FY17 FY18 FY19 FY20E FY21E FY22E FY23E CAGR (%) Refining Througput (MMT) IOCL 58.0 65.2 69.0 71.8 70.4 74.9 77.9 82.9 3.6 BPCL 24.1 25.4 28.5 31.0 30.3 31.1 31.1 31.1 0.0 HPCL 17.2 17.8 18.2 18.5 17.8 20.2 28.2 28.2 11.1 Throughput Growth (yoy,%) IOCL 8.3 12.4 5.8 4.1 (2.0) 6.4 4.0 6.4 BPCL 3.3 5.3 12.4 8.7 (2.4) 2.6 0.0 0.0 HPCL 6.5 3.3 2.2 1.6 (3.7) 13.6 39.1 0.0 GRM ($/bbl) IOCL 5.1 7.8 8.5 5.4 8.3 8.9 8.7 8.8 12.9 BPCL 6.6 5.3 6.9 4.6 7.2 7.8 7.3 7.5 13.1 HPCL 6.7 6.2 7.4 5.0 7.2 7.8 7.5 7.7 11.3 Marketing sales volume (MMT) IOCL 76.1 78.8 84.3 85.1 86.5 89.5 93.0 96.3 3.1 BPCL 38.4 40.2 43.2 45.0 46.1 48.0 50.2 52.2 3.8 HPCL 34.2 35.2 36.9 38.7 40.0 41.9 43.9 45.8 4.3 Volume Growth (%) IOCL (0.5) 3.6 7.0 0.9 1.6 3.5 3.9 3.5 BPCL 4.8 4.6 7.5 4.1 2.4 4.3 4.5 4.0 HPCL 7.1 3.0 4.8 4.8 3.3 4.7 4.9 4.3 Core Marketing margin (INR/ltr) IOCL 3.8 3.5 3.9 4.6 4.2 4.4 4.6 4.9 1.5 BPCL 4.5 3.6 3.7 4.6 4.2 4.4 4.6 4.8 1.2 HPCL 3.4 3.9 3.6 4.4 4.0 4.2 4.4 4.6 1.3 Source: Edelweiss research
With operating cash flow at IOCL averaging INR370bn annually over FY19–23E, IOCL is likely to consistently generate positive free cash flow despite annual capex doubling on average versus FY14–18 levels (refer to charts 73 and 74). BPCL and HPCL will, however, generate negative free cash flow as operating cash flow will be insufficient with capex almost doubling over FY19–23E (refer to charts 75 and 76).
45 Edelweiss Securities Limited
Oil & Gas
Chart 73: IOCL to record RoCE improvement Chart 74: IOCL is the only OMC with positive free cash flow 24.0 400 0.8
300 0.6 20.5 200 0.5 17.0
100 0.3 (%)
(INR Bn) (INR ROCE (%) ROCE 13.5 0 0.2
10.0 (100) 0.0
FY17 FY18 FY19
FY17 FY18 FY19
FY22E FY20E FY21E FY23E
FY23E FY20E FY21E FY22E IOCL BPCL HPCL Capex Free cash flow Net Debt/Equity
Source:Companies, Edelweiss research
Chart 75: Significantly higher capex to pump up leverage… Chart 76: …and pump out negative free cash flow at BP, HP 250 2.0 250 2.0
180 1.6 187 1.6
110 1.2 124 1.2 (%)
40 0.8 (%) 61 0.8
(INR bn) (INR (INR bn) (INR
(30) 0.4 (2) 0.4
(100) 0.0 (65) 0.0
FY17 FY18 FY19
FY17 FY18 FY19
FY20E FY21E FY22E FY23E
FY20E FY21E FY22E FY23E Capex Free cash flow Net Debt/Equity Capex Free cash flow Net debt-equity
Source:Companies, Edelweiss research
Edelweiss Securities Limited 46 Sector Update
Global refining upcycle imminent
1) No sign of a material demand slowdown: Demand growth is expected to remain healthy at a CAGR of 1.1% through CY23E led by a pickup in growth in middle distillates (+1.4%) with the advent of IMO and sustained growth in light distillates (1.3%). According to BP World Energy Outlook, India and China will together contribute 50% of incremental demand by CY23E. 2) EVs will take time: Even after assuming 20% sales penetration by 2025 (20mn electric vehicles sold annually), EVs will make up a small fraction of global vehicle parc (over 1bn). Assuming cost parity with an ICE engine is reached by 2025, it will still take considerable time to replace the existing vehicle fleet. 3) Capacity additions continue to lag: Net capacity additions will remain anemic, growing at barely 1% CAGR through CY23 as refiners remain cautious on capacity expansion in light of concerns around electrification. Additionally, petrochemicals are increasingly taking up a greater share of incremental capex due to greater demand visibility. We also expect capacity outages to remain significant in the near term due to maintenance/upgradation/integration projects. 4) IMO leg-up for refining margins: We expect Singapore GRM to increase to USD7.8/bbl in 2020 from USD3.5/bbl in Q1FY20 led by an increase in middle and light distillate cracks once the new IMO norm takes effect. Incremental diesel demand due to this regulation is likely to boost diesel cracks to USD21/bbl by 2020, easily offsetting the decline in HSFO cracks.
Not so slippery: Oil demand to remain stronger for longer According to British Petroleum’s World Energy Outlook (to 2040), while long-term demand may remain capped due to impending electrification, there aren’t really any impediments to growth in the near term. In fact, BP believes the recent pickup in demand would sustain at a CAGR of 1.1% over 2018–23E, led primarily by growth in middle distillates (+1.4%) and light distillates (+1.3%). As a result, oil demand should reach an all-time high of 105mmbpd by 2023, auguring a sustained upcycle for refiners (refer to chart 77).
While we expect HSFO (high sulphur fuel oil) shipping demand to drop from 3mmbpd to 1.5mmbpd by 2020, (more on this in the IMO section), we estimate refiners will eventually have enough capacity to replace this with LSFO (low sulphur fuel oil) or marine gasoil and ensure uninterrupted supply to shippers. We expect gasoil demand to spike initially as the IMO regulations kick in and are factoring in a 3.7% CAGR for gasoil demand from 2018–20E.
Gasoline demand should continue to remain firm (2018–20E CAGR: 1.7%) as emerging markets such as China and India continue to report robust growth in PV (passenger vehicle) sales while passenger miles remain steady in developed markets. Naphtha/ATF demand will continue to remain robust (2018–20 CAGR: 1.6%) on the back of sustainable demand from petrochemicals/aviation passenger traffic.
47 Edelweiss Securities Limited
Oil & Gas
Chart 77: Global demand CAGR of 1.1% through 2023 driven by middle distillates 120 4.0%
96 2.9%
72 1.8% (%) 48 0.7%
24 -0.4% Product Demand (Mmbpd) ProductDemand
0 -1.5%
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018
2020E 2022E Others Naphtha Jet/kerosene Fuel oil LPG Gasoline Gasoil Demand % Growth Source: FGE, BP Review, Edelweiss research
Demand growth led by India and China Out of the 2.6mmbpd incremental demand through 2020E, BP expects 50% would be contributed by India (2018–20 CAGR: 5%) and China (2018–20 CAGR: 2.5%). India should add another 0.5mmbpd to annual demand. Other growth markets include the Middle East and Africa, which should grow at 2.5% and 3.6%, respectively, while we expect Europe to contract by 2.2% (refer to chart 78).
Although electrification continues to remain a big overhang on sustainable oil demand, we believe these concerns are overblown. Fuel efficiency upgrades, in our opinion, are a greater lag on demand; although any reduction in demand due to this would be easily offset by low vehicle penetration in emerging markets.
Chart 78: Over 50% of incremental volumes would originate from India and China 105
103 0.6 102.4 0.3 0.3 0.1 0.3 0.3 101 0.3 0.3 0.2 0.3 101 0.3 0.6 0.2 99.8 0.3 0.7 99 98.4
97 Product Demand (Mmb/d) ProductDemand
95
USA
India India India
2017 2018 2019
China China China
Africa
2020E
Others Others Others
Europe Europe Middle East Middle Middle East Middle Source: BP Review, Edelweiss research
Edelweiss Securities Limited 48 Sector Update
Electrification: Sifting fact from fiction – Concerns overdone Although there is heavy noise around electrification with several articles predicting a doomsday scenario for oil, the truth is that electrification is still in its infancy. We believe that oil demand growth would continue to be linked to GDP growth and fuel efficiency norms; electrification would have minimal impact on demand, at least for the next decade.
1) Only 45% of oil demand is exposed to electrification (gasoline, diesel for road transport). Products such as jet fuel, naphtha, LPG, etc will continue to drive demand growth (refer to figure 2).
2) At just 4% of annual volumes and around 1% of parc, EV volumes have a long way to go.
3) EVs continue to be more expensive and lack the range and performance of an ICE engine. In the absence of government incentives, consumers prefer a gasoline engine (refer to chart 79).
Fig. 2: Only 45% of oil demand is exposed to electrification Chart 79: EV sales: Just 4% of annual volumes and 1% of parc 1,200
960
720 (Mn ) (Mn 480
240 4%of annual sales
0 Vehicle parc Annual ÈV sales
Source: FGE, Edelweiss research Source: Media reports, Edelweiss research
BP forecasts peak oil demand by 2030
Even if EV sales penetration is assumed at 20% by 2025 (based on government targets), BP expects oil demand to peak only by 2030, which implies investors can leverage one entire oil cycle (from exploration to extraction). This is mainly due to the sheer scale of the market; with over 1bn cars used globally and 100mn cars sold annually, it takes ten years just to replace the entire fleet. Currently, less than 4mn EVs are sold globally with majority of these being plug-in hybrids, which rely on gasoline, albeit to a lower extent (refer to chart 80).
We concur that cost parity with an ICE engine (USD100/kwH) will be an inflection point with EV sales potentially skyrocketing post parity. Based on consensus, 2025 could be that tipping point and is worth keeping an eye out for. However, we believe this is would still not affect the forecast of peak oil demand by 2030 due to the sheer size of the global ICE fleet. The EV penetration rate, however, would certainly affect the rate of decline post-2030.
49 Edelweiss Securities Limited
Oil & Gas
Chart 80: We assume 20% penetration and cost parity with ICE by 2025 100.0
80.0
60.0 (%) 40.0
20.0
0.0
2014 2016 2018 2012
2020E 2022E 2024E 2026E 2028E 2030E 2032E 2034E 2036E 2040E 2038E
EV Sales Penetration (%)
Source: BP Energy Review, Media reports, Edelweiss research
Consumers shying away from electric cars At current battery costs and range, consumers would rather drive an ICE-powered vehicle. Countries that have doled out subsidies to promote EVs as they bring down the cost of ownership are the ones with higher EV penetration. In the absence of such incentives, EV sales plunge sharply. In both the Netherlands and Denmark, which log relatively high EV sales, we expect a steep drop after incentives expire (refer to charts 81 and 82).
Chart 81: EV sales crashed after expiry of incentives… Chart 82: …. across the Netherlands and Denmark
30,000 30,000 Expiry of 24,000 tax break 24,000 Tax exemption expires
18,000 18,000
Units (Units) 12,000 Company 12,000 vehicles incentive 6,000 expire 6,000
0 0
Q1 2018Q1 Q1 2013Q1 2013Q3 2014Q1 2014Q3 2015Q1 2015Q3 2016Q1 2016Q3 2017Q1 2017Q3
Q1 2014Q1 2014Q3 Q3 2013Q3 2015Q1 2015Q3 2016Q1 2016Q3 2017Q1 2017Q3 2018Q1 Q1 2013Q1 Source: Media reports, Edelweiss research
Edelweiss Securities Limited 50 Sector Update
OEMs too going slow on launches At current battery prices (USD35k for a 200-mile battery), mass market EVs are simply unprofitable. We have seen premium OEMs (Tesla, BMW i-series, Mercedes) going more aggressive on EV launches due to lower demand elasticity of their EVs. For EVs to make a major dent in oil demand, battery costs must halve and mass market EV launches must pick up in our view, not to mention allied enablers such as availability of charging infrastructure.
Oil supply deficit even after electrification If we assume oil demand would peak at 110mmbpd in 2030 and fall to 20mmbpd by 2100 (petchem/industrial demand, oil eliminated from transport/heating/power), we would still need around 1.8tn barrels for the rest of the century. With just 1.7tn barrels of proven reserves, further exploration is essential (refer to chart 83).
Chart 83: To meet demand, even factoring in electrification, exploration is needed
1,850
1,810 1800
1,770 Supply deficit of 100mn barrels 1,730 (Mn barrels)(Mn 1700 1,690
1,650 Reserves Production
Source: BP Review, Edelweiss research
Supply deficit to persist through next decade We expect refining capacity to grow at a relatively muted CAGR of 0.9% (versus demand growth of 1.1%) through 2023. We have adjusted capacity addition announcements based on startup dates, which would lead to a divergence in our capacity estimates versus project announcements. For example, we estimate net capacity addition of just 0.5mmbpd in 2019 versus announcement of 2mmbpd as most of the capacity additions for the year are back- ended (November-December 2019).
We have also not incorporated supply outages due to maintenance/upgradation in our capacity addition forecasts, which could lead to further upside in GRM. Based on current announcements, outages could lead to a 3.6mmbpd cut in refining capacity. We believe this downtime is likely to be overachieved as refiners gear up for IMO and add petchem capacities to existing refineries (refer to chart 84).
51 Edelweiss Securities Limited
Oil & Gas
Chart 84: With demand outstripping supply, utilisation likely to go up to 84% by 2023 120 90.0%
96 87.0%
72 84.0%
48 81.0% Utilization Utilization (%) 24 78.0%
Refining Capacity(Mmbpd) Refining 0 75.0%
2000 2002 2006 2010 2014 2018 2004 2008 2012 2016
2022E 2020E Africa Middle East CIS South America Europe North America Asia Pacific Capacity % Utilisation Source: FGE, BP Review, Edelweiss research
Headwinds for capacity growth
We see several key reasons behind refiners’ reluctance to commit to significant capacity expansion:
1. Long-term demand: With electrification looming on the horizon, refiners are hesitant to invest significant capital in refining capacity. We, however, believe concerns on EV penetration are exaggerated and EV offtake would be slower than what the prevailing market sentiment suggests.
2. Very long payback periods: With the payback period topping 20 years, refiners are presumably unwilling to commit to such long-gestation investments.
3. Investments in petchem integration: Refiners are increasingly diversifying into chemicals as a hedge against oil transport demand, which has diverted capex from refining projects.
Supply deficit to boost benchmark GRM We expect a severe supply deficit in 2019 as the bulk of capacity additions for the year are back-ended. While the market would return to a surplus in 2020, we expect this to be absorbed by incremental demand during 2020–23E. Along with the IMO regulation (IMO: A huge boost to middle distillate cracks), which should boost diesel cracks, this would lead to Singapore GRM rising to over USD7.8/bbl by 2020, ushering in a year of supernormal profits for refiners (refer to chart 85).
Edelweiss Securities Limited 52 Sector Update
Chart 85: Given favourable demand-supply balance and higher middle-distillate cracks due to new IMO norm, we expect Singapore GRM to touch USD7.8/bbl by 2020 3.0 15
12 2.0
9
1.0 Mmb/d
6 US$/bbl
0.0 3
(1.0) 0
2001 2002 2003 2005 2006 2007 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2004 2008
2020E 2021E 2022E 2023E Incremental Demand Incremental Capacity Singapore GRM
Source: FGE, BP Review, Reuters, Edelweiss research
Refinery additions back-ended in 2019; deficit to return from 2021 As we show in the chart above, adjusted for startup dates, incremental capacity additions in 2019 falls to just 0.5mmb/d versus nameplate capacity additions aggregating 2mmb/d (since significant capacity will be commissioned in November and December 2019). The recent weakness in GRM is partly due to the market pricing in a surplus in 2020 (refer to chart 86).
We believe the quantum of overcapacity is being overestimated by the market; we expect capacity surplus of 0.3 mmb/d in 2020 and a reversion to capacity deficit from 2021. Due to the reasons mentioned in the previous section, we believe capacity additions will remain subdued and will lag incremental demand (refer to table 18 and chart 87).
Chart 86: Over 72% of additional capacity in 2019 likely to come on stream in November and December
1,000 Hengli, Fujian, (China), Guangdong (China), Panipat, Koyali Jizan (Saudi) Al-Zour (Kuwait) Barauni (India) (India), 800 Sriracha (Thailand) Rongsheng (China) 600
Mina Abdullah, PMB (Brunei), Rio Guangdong 400 Kuwait RAPID, Malaysia de Janeiro (Brazil) (China), Barauni
Refinery additions (Kb/d) Refinery additions 200
0
19 20
20 22
19 22
20 23
19 19 21
21 19 21
19 19 20 21 22 22 23 20 21 23
19 20
- -
- -
- -
- -
-
- -
- - -
- - - - -
- - - - -
- -
Jul Jul
Jun Jun Jun Jun Jun
Oct Oct
Apr Apr
Sep Feb Feb
Dec Dec
Aug Aug
Nov
Mar Mar Mar Mar Mar
May May
Source: BP Review, Edelweiss research
53 Edelweiss Securities Limited
Oil & Gas
Table 18: Very long payback periods render big investments risky Annual refinery economics Refinery capacity (MMT) 10.0 Capex ($/MT) 600.0 Total capex ($ Bn) 6.0 GRM ($/bbl) 8.0 Opex ($/bbl) 2.0 Tax rate 34% Annual cash flow ($ Bn) 0.3 Payback Period (years) 21 Source: BP Review, Edelweiss research
Chart 87: Most upcoming greenfield refineries outfitted with petchem plants
Dayushan Island, China Ratnagiri, India Jieyang, China
Dalian 3, China RAPID, Malaysia Mumbai, India (BPCL) Paradip, India (IOCL)
0 10 20 30 40 50 60 70 MTPA Petchem capacity Refining capacity Source: Company reports, Edelweiss research
Another trend we observe is that refiners are increasingly favouring brownfield expansion (over greenfield capacity) as payback periods tend to be shorter as upfront capex is lower. However, due to this, and the fact that refineries have been running at high utilisation rates over the past few years (80%+ since 2014), we expect refinery outages due to maintenance/upgradation/expansion to continue and reduce available capacity meaningfully over the next few years.
Refinery outages have averaged 5% of capacity historically On average, 5–6mmbpd of refining capacity has undergone maintenance shutdown every year since 2011. Typically, refineries are shut down for one–two months, which materially affects the demand-supply balance (refer to table 19).
High historical utilisation rates, integration with petchem plants and upgradation due to IMO regulations are expected to keep maintenance outages elevated through 2020. Although we have not factored in refinery outages for our 2019 capacity forecast, we do expect a spike in outages during the year ahead of the BS-6/IMO upgradation, which would partially offset planned capacity additions over the next few years (refer to chart 88).
Edelweiss Securities Limited 54 Sector Update
Chart 88: Maintenance outages to remain elevated in 2018–20
2019 * 2018 2017 2016 2015 2014 2012 2011
0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 Mmbpd Planned outages Unplanned outages
Planned shutdowns till date for 2019 Source: Bloomberg, Edelweiss research Table 19: Announced maintenance outages in 2019 Capacity Operator Refinery Region (mmbpd) Offline Restart Days offline Exxon Mobil Corp ExxonMobil Beaumont Refinery United States of America 240.0 Jan-19 Jan-19 5 Agip Petroli SpA ENI (Agip) Milazzo Refinery Italy 100.0 Jan-19 Jan-19 10 Total Petrochemicals & Refining USA IncTotal Port Arthur Refinery United States of America 37.1 Jan-19 Jan-19 8 ERG Petroli SPA Lukoil ISAB Priolo North Ref Italy 124.0 Jan-19 Jan-19 3 Marathon Petroleum Corp Marathon Wilmington Refinery United States of America 97.5 Jan-19 Jan-19 5 Chevron USA Inc Chevron Pasadena Refinery United States of America 112.2 Jan-19 Jan-19 5 Imperial Oil Ltd Imperiod Oil Sarnia Refinery Canada 121.0 Jan-19 Jan-19 2 Rosneft Oil Co PJSC Rosneft Angarsk Refinery Russia 87.7 Jan-19 Jan-19 13 Abu Dhabi National Oil Co ADNOC Ruwais Refinery United Arab Emirates 240.0 Jan-19 Jan-19 30 Marathon Petroleum Corp Marathon Catlettsburg Refinery United States of America 138.0 Jan-19 Feb-19 2 Bashneft PJSC Bashneft OAO Ufa Ref Russia 138.2 Jan-19 Feb-19 20 Marathon Petroleum Corp Marathon Catlettsburg Refinery United States of America 138.0 Jan-19 Feb-19 5 PBF Energy Inc Chalmette Refinery United States of America 95.0 Jan-19 Feb-19 30 PBF Energy Inc Chalmette Refinery United States of America 95.0 Jan-19 Feb-19 31 Exxon Mobil Corp ExxonMobil Beaumont Refinery United States of America 240.0 Feb-19 Feb-19 3 API Anonima Petroli Italiana SpA Anonima Falconara Refinery Italy 78.3 Jan-19 Feb-19 36 PBF Energy Partners LP PBF Delaware City Refinery United States of America 182.2 Feb-19 Feb-19 9 BP PLC BP Whiting Refinery United States of America 75.0 Jan-19 Feb-19 18 Chevron Corp Chevron Richmond Refinery United States of America 245.3 Feb-19 Feb-19 11 Ruhr Oel GmbH PCK Schwedt Refinery Germany 74.0 Feb-19 Feb-19 4 Reliance Industries Ltd RIL Jamnagar DTA Refinery India 330.0 Jan-19 Feb-19 28 JXTG Holdings Inc JXTG Nippon Wakayama Refinery Japan 127.5 Feb-19 Feb-19 8 Philadelphia Energy Solutions LLC PES Philadelphia Refinery United States of America 200.0 Jan-19 Feb-19 31 BP PLC BP Rotterdam Refinery Netherlands 190.0 Feb-19 Feb-19 1 Marathon Petroleum Corp Marathon Wilmington Refinery United States of America 97.5 Feb-19 Feb-19 2 Marathon Petroleum Corp Marathon Detroit Refinery United States of America 139.0 Feb-19 Feb-19 15 Valero Energy Corp Valero Ardmore Refinery United States of America 86.0 Feb-19 Feb-19 12 Agip Petroli SpA ENI (Agip) Milazzo Refinery Italy 100.0 Feb-19 Feb-19 7 Cia Espanola de Petroleos SAU Cepsa Gibraltar Refinery Spain 117.0 Jan-19 Feb-19 31 RussNeft PJSC Russneft Orsk Refinery Russia 21.2 Feb-19 Feb-19 13 Valero Energy Corp Valero Memphis Refinery United States of America 100.0 Feb-19 Feb-19 0 Agip Petroli SpA ENI (Agip) Milazzo Refinery Italy 137.0 Feb-19 Feb-19 1 Source: Bloomberg, Edelweiss research
55 Edelweiss Securities Limited
Oil & Gas
Table 19: Announced maintenance outages in 2019 (contd.) Capacity Operator Refinery Region (mmbpd) Offline Restart Days offline Yug Rusi OOO Yug Rusi Novoshakhtinsk Ref Russia 52.0 Feb-19 Feb-19 24 Suncor Energy Inc Suncor Commerce City W Ref United States of America 10.1 Jan-19 Feb-19 58 Total Petrochemicals & Refining USA IncTotal Port Arthur Refinery United States of America 74.3 Jan-19 Mar-19 42 Shandong Hengyuan Petrochemical CoHengyuan Ltd Refinery China China 70.2 Feb-19 Mar-19 3 Krasnodareconeft ZAO Krasnodareconeft Krasnodar Ref Russia 29.3 Feb-19 Mar-19 3 Phillips 66 Phillips 66 Sweeny Refinery United States of America 69.0 Jan-19 Mar-19 51 Shandong Hengrunde Petrifaction Co LtdHengrunde Refinery China China 34.1 Feb-19 Mar-19 18 Repsol SA Reposol Tarragona Refinery Spain 36.0 Feb-19 Mar-19 9 HollyFrontier Corp HollyFrontier Tulsa West Ref United States of America 85.0 Mar-19 Mar-19 1 Marathon Petroleum Corp Marathon Dakota Refinery United States of America 19.5 Mar-19 Mar-19 1 PBF Energy Partners LP PBF Delaware City Refinery United States of America 182.2 Mar-19 Mar-19 3 Ineos Group Holdings Ltd Ineos Grangemouth Refinery United Kingdom 35.0 Feb-19 Mar-19 9 Chevron Corp Chevron Richmond Refinery United States of America 245.3 Mar-19 Mar-19 3 Phillips 66 Phillips 66 Ponca City Ref United States of America 75.0 Feb-19 Mar-19 29 Congolaise de Raffinage Congolaise Pointe Noire Ref Congo, Republic 21.0 Mar-19 Mar-19 5 Krasnodareconeft ZAO Krasnodareconeft Krasnodar Ref Russia 33.0 Feb-19 Mar-19 24 Indian Oil Corp Ltd IOCL Panipat Refinery India 150.0 Feb-19 Mar-19 24 SLOVNAFT AS Slovnaft Bratislava Refinery Slovakia 55.0 Mar-19 Mar-19 3 Valero Energy Corp Valero New Orleans Norco Ref United States of America 215.0 Jan-19 Mar-19 57 Saras SpA Saras Sarroch Refinery Italy 130.0 Jan-19 Mar-19 58 BP PLC BP Gelsenkirchen Refinery Germany 66.3 Mar-19 Mar-19 4 Preem Raffinaderi AB Preem Lysekil Refinery Sweden 33.0 Jan-19 Mar-19 68 China Petroleum & Chemical Corp Sinopec Qilu Refinery China 80.2 Mar-19 Mar-19 14 Repsol SA Repsol Petronor Bilbao Ref Spain 55.0 Jan-19 Mar-19 59 China Petroleum & Chemical Corp Sinopec Qilu Refinery China 50.1 Mar-19 Mar-19 4 Rosneft Oil Co PJSC Rosneft Ryazan Refinery Russia 83.6 Mar-19 Mar-19 8 ERG Petroli SPA Lukoil ISAB Priolo North Ref Italy 124.0 Feb-19 Mar-19 17 Saras SpA Saras Sarroch Refinery Italy 130.0 Mar-19 Mar-19 3 LUKOIL PJSC Lukoil Volgograd Refinery Russia 120.0 Mar-19 Mar-19 15 Motiva Enterprises LLC Motiva Port Arthur Refinery United States of America 200.0 Mar-19 Mar-19 1 Lyondell Citgo Refining LP LyondellBasell Houston Ref United States of America 135.8 Mar-19 Mar-19 7 Valero Energy Corp Valero Corpus Christi West Ref United States of America 40.0 Jan-19 Mar-19 68 HollyFrontier Corp HollyFrontier Tulsa West Ref United States of America 85.0 Mar-19 Mar-19 1 Valero Energy Corp Valero Port Arthur Refinery United States of America 82.5 Mar-19 Mar-19 13 Lazarus Energy LLC Blue Dolphin Nixon Refinery United States of America 13.8 Mar-19 Mar-19 10 Marathon Petroleum Corp Marathon Robinson Refinery United States of America 245.0 Mar-19 Mar-19 24 LUKOIL PJSC Lukoil Burgas Refinery Bulgaria 64.4 Mar-19 Mar-19 19 S-Oil Corp S-Oil Onsan Refinery South Korea 250.0 Mar-19 Mar-19 29 Polski Koncern Naftowy ORLEN SA PKN Mazeikiu Nafta Refinery Lithuania 60.2 Mar-19 Mar-19 30 Shell Oil Co Shell Pernis Refinery Netherlands 50.5 Jan-19 Mar-19 65 Shell Oil Co Shell Pernis Refinery Netherlands 50.5 Jan-19 Mar-19 65 Wynnewood Refining Co Wynnewood Refinery United States of America 35.0 Feb-19 Mar-19 58 Formosa Petrochemical Corp Formosa Mailiao Refinery Taiwan 180.0 Mar-19 Mar-19 30 Tupras Turkiye Petrol Rafinerileri AS Tupras Tupras Batman Refinery Turkey 14.6 Feb-19 Mar-19 58 INA Industrija Nafte DD INA Rijeka Refinery Croatia 90.0 Jan-19 Mar-19 89 Rosneft Oil Co PJSC Rosneft Ryazan Refinery Russia 170.0 Mar-19 Mar-19 14 China Petroleum & Chemical Corp Sinopec Maoming Refinery China 471.3 Mar-19 Apr-19 31 Phillips 66 WRB Wood River Refinery United States of America 167.0 Jan-19 Apr-19 68 Chevron USA Inc Chevron Pasadena Refinery United States of America 112.2 Mar-19 Apr-19 3 Antipinsky NPZ ZAO Antipinsky Antipino Refinery Russia 70.3 Apr-19 Apr-19 1 Mariisky NPZ Ltd Mariisky NPZ Mari-El Refinery Russia 16.0 Apr-19 Apr-19 3 Mariisky NPZ Ltd Mariisky NPZ Mari-El Refinery Russia 12.9 Apr-19 Apr-19 3 Source: Bloomberg, Edelweiss research
Edelweiss Securities Limited 56 Sector Update
Table 19: Announced maintenance outages in 2019 (contd.) Capacity Operator Refinery Region (mmbpd) Offline Restart Days offline Antipinsky NPZ ZAO Antipinsky Antipino Refinery Russia 69.1 Mar-19 Apr-19 10 PBF Energy Partners LP PBF Delaware City Refinery United States of America 54.7 Mar-19 Apr-19 31 JXTG Nippon Oil & Energy Corp JXTG Nippon Osaka Refinery Japan 115.0 Mar-19 Apr-19 36 Exxon Mobil Corp ExxonMobil Baton Rouge Ref United States of America 110.0 Feb-19 Apr-19 57 Ineos Group Holdings Ltd Ineos Grangemouth Refinery United Kingdom 65.0 Feb-19 Apr-19 58 Exxon Mobil Corp ExxonMobil Gravenchon Refinery France 35.0 Feb-19 Apr-19 48 Exxon Mobil Corp ExxonMobil Gravenchon Refinery France 82.5 Feb-19 Apr-19 48 Saudi Arabian Oil Co Saudi Aramco Yanbu Refinery Saudi Arabia 240.0 Mar-19 Apr-19 44 Polski Koncern Energetyczny SA PKN Koncern Plock Refinery Poland 327.3 Mar-19 Apr-19 31 China National Offshore Oil Corp CNOOC Huizhou Refinery China 240.7 Feb-19 Apr-19 56 China Petroleum & Chemical Corp Sinopec Yangzi Refinery China 120.3 Mar-19 Apr-19 27 Phillips 66 Phillips 66 Billings Refinery United States of America 38.0 Apr-19 Apr-19 7 LUKOIL PJSC Lukoil Perm Refinery Russia 93.9 Apr-19 Apr-19 1 Delek US Energy Inc Delek El Dorado Refinery United States of America 83.0 Mar-19 Apr-19 35 Rosneft Oil Co PJSC Rosneft Novokuibyshevsk Ref Russia 34.7 Mar-19 Apr-19 34 Antipinsky NPZ ZAO Antipinsky Antipino Refinery Russia 70.3 Apr-19 Apr-19 6 Shandong Changyi PetroChemical Co LtdChangyi Refinery China China 120.3 Mar-19 Apr-19 31 JXTG Holdings Inc JXTG Nippon Chiba Refinery Japan 129.0 Mar-19 Apr-19 40 Ruhr Oel GmbH PCK Schwedt Refinery Germany 74.0 Mar-19 Apr-19 45 Phillips 66 Phillips 66 Wilmington Ref United States of America 139.0 Mar-19 Apr-19 37 Phillips 66 Phillips 66 Billings Refinery United States of America 38.0 Apr-19 Apr-19 4 Deutsche Shell AG Shell Godorf Refinery Germany 116.0 Apr-19 Apr-19 4 RussNeft PJSC Russneft Orsk Refinery Russia 37.5 Apr-19 Apr-19 9 EP Petroecuador EP Esmeraldas Refinery Ecuador 55.0 Mar-19 Apr-19 53 Mariisky NPZ Ltd Mariisky NPZ Mari-El Refinery Russia 12.9 Apr-19 Apr-19 3 Mariisky NPZ Ltd Mariisky NPZ Mari-El Refinery Russia 16.0 Apr-19 Apr-19 2 Shell Oil Co Shell Deer Park Refinery United States of America 275.0 Apr-19 Apr-19 6 Afipsky Oil Refinery Ltd NefteGazIndustriya Afipsky Ref Russia 57.0 Apr-19 Apr-19 9 Afipsky Oil Refinery Ltd NefteGazIndustriya Afipsky Ref Russia 53.0 Apr-19 Apr-19 9 SLOVNAFT AS Slovnaft Bratislava Refinery Slovakia 60.0 Apr-19 Apr-19 1 Gazprom Neft PJSC Gazprom Omsk Refinery Russia 76.2 Apr-19 Apr-19 24 Rosneft Oil Co PJSC Rosneft Syzran Refinery Russia 52.3 Apr-19 Apr-19 24 Idemitsu Kosan Co Ltd Idemitsu Hokkaido Refinery Japan 150.0 Apr-19 Apr-19 10 Rizhao Landbridge Gangkou PetrochemicalGangkou Co Ltd Refinery China China 70.2 Mar-19 Apr-19 48 Petron Corp Petron Bataan Refinery Philippines 180.0 Apr-19 Apr-19 6 CHS Inc CHS McPherson Refinery United States of America 49.0 Mar-19 Apr-19 35 Bashneft PJSC Bashneft Ufaneftekhim Refinery Russia 62.8 Apr-19 Apr-19 7 Shandong Binhua Binyang CombustionBinyang Chemical Refinery Co Ltd China China 96.3 Mar-19 Apr-19 34 LUKOIL PJSC Lukoil Nizhny Novogorod Ref Russia 39.8 Apr-19 Apr-19 25 GS Caltex Corp GS Caltex Yeosu Refinery South Korea 150.0 Apr-19 Apr-19 29 CHS Inc CHS McPherson Refinery United States of America 49.0 Mar-19 Apr-19 37 PBF Energy Inc PBF Energy Paulsboro Refinery United States of America 105.0 Apr-19 May-19 12 Mangalore Refinery & PetrochemicalsONGC Ltd Mangalore Refinery India 300.0 Apr-19 May-19 16 Antipinsky NPZ ZAO Antipinsky Antipino Refinery Russia 15.5 Apr-19 May-19 18 Rosneft Oil Co PJSC Rosneft Tuapse Refinery Russia 140.0 Feb-19 May-19 75 Rosneft Oil Co PJSC Rosneft Tuapse Refinery Russia 50.0 Feb-19 May-19 75 Rosneft Oil Co PJSC Rosneft Tuapse Refinery Russia 50.0 Feb-19 May-19 75 Shell Oil Co Shell Pernis Refinery Netherlands 70.7 Apr-19 May-19 24 Shell Oil Co Shell Pernis Refinery Netherlands 70.7 Apr-19 May-19 24 Repsol SA Reposol Cartagena Refinery Spain 100.0 May-19 May-19 1 China Petroleum & Chemical Corp Sinopec Zhenhai Refinery China 120.3 Apr-19 May-19 35 Marathon Petroleum Corp Marathon Catlettsburg Refinery United States of America 139.0 Apr-19 May-19 9 Source: Bloomberg, Edelweiss research
57 Edelweiss Securities Limited
Oil & Gas
Table 19: Announced maintenance outages in 2019 (contd.) Capacity Operator Refinery Region (mmbpd) Offline Restart Days offline Rosneft Oil Co PJSC Rosneft Novokuibyshevsk Ref Russia 126.0 May-19 May-19 5 Lyondell Citgo Refining LP LyondellBasell Houston Ref United States of America 135.8 May-19 May-19 1 Motiva Enterprises LLC Motiva Port Arthur Refinery United States of America 200.0 May-19 May-19 1 Motiva Enterprises LLC Motiva Port Arthur Refinery United States of America 80.0 May-19 May-19 1 PetroChina Co Ltd PetroChina Dalian West Ref China 200.5 Apr-19 May-19 40 Alliance Oil Co Alliance Khabarovsk Refinery Russia 62.0 Apr-19 May-19 23 Tabriz Oil Refining Co NIORDC Tabriz Refinery Iran 100.0 Apr-19 May-19 34 Lazarus Energy LLC Blue Dolphin Nixon Refinery United States of America 13.8 May-19 May-19 3 Surgutneftegas OAO Surgutneftegas Kirishi Ref Russia 35.6 Apr-19 May-19 36 BP PLC BP Whiting Refinery United States of America 95.0 May-19 May-19 3 TOTAL SA Total Elf Donges Refinery France 219.0 May-19 May-19 0 Shell Oil Co Shell Deer Park Refinery United States of America 240.0 Mar-19 May-19 51 Gunvor Group Ltd Gunvor Rotterdam Refinery Netherlands 38.0 May-19 May-19 12 Fuji Oil Co Ltd/Tokyo Fuji Sodegaura Refinery Japan 143.0 May-19 May-19 2 Societe Nationale Pour La Recherche LaSona Production Augusta Le Refinery Transport La TransformationItaly 198.0 Feb-19 May-19 87 Alliance Oil Co Alliance Khabarovsk Refinery Russia 34.8 Apr-19 May-19 29 Chevron USA Inc Chevron Pasadena Refinery United States of America 112.2 May-19 May-19 0 API Anonima Petroli Italiana SpA Anonima Falconara Refinery Italy 78.3 May-19 May-19 0 Imperial Oil Ltd Imperiod Oil Sarnia Refinery Canada 121.0 Mar-19 May-19 61 Rosneft Oil Co PJSC Rosneft Ryazan Refinery Russia 63.0 Mar-19 May-19 53 ERG Petroli SPA Lukoil ISAB Priolo North Ref Italy 124.0 Apr-19 May-19 28 Cia Espanola de Petroleos SAU Cepsa La Rabida Refinery Spain 100.0 May-19 May-19 14 CITGO Petroleum Corp Citgo Corpus Christi Refinery United States of America 157.5 Mar-19 May-19 68 LUKOIL PJSC Lukoil Ukhta Refinery Russia 83.0 May-19 May-19 13 LUKOIL PJSC Lukoil Ukhta Refinery Russia 41.9 May-19 May-19 13 Saras SpA Saras Sarroch Refinery Italy 110.0 May-19 May-19 4 BP PLC BP Whiting Refinery United States of America 75.0 Apr-19 May-19 43 Polski Koncern Energetyczny SA PKN Koncern Plock Refinery Poland 69.5 Apr-19 May-19 30 Preem AB Preem Petro Gothenburg Ref Sweden 12.5 Apr-19 May-19 31 OMV AG OMV Burghausen Refinery Germany 54.2 May-19 May-19 21 Hyundai Oilbank Co Ltd Hyundai Daesan Refinery South Korea 130.0 May-19 May-19 29 RussNeft PJSC Russneft Orsk Refinery Russia 21.2 May-19 May-19 29 Preem Raffinaderi AB Preem Lysekil Refinery Sweden 220.0 May-19 May-19 23 Fuji Oil Co Ltd/Tokyo Fuji Sodegaura Refinery Japan 143.0 May-19 May-19 29 China Petroleum & Chemical Corp Sinopec Beijing Refinery China 310.8 May-19 Jun-19 31 Husky Energy Inc Husky Prince George Refinery Canada 11.3 Apr-19 Jun-19 49 Societe Ivoirienne de Raffinage SIR Abidjan Refinery Ivory Coast 84.0 May-19 Jun-19 3 Mariisky NPZ Ltd Mariisky NPZ Mari-El Refinery Russia 16.0 Jun-19 Jun-19 1 LiJin Petrochemical Plant Co Ltd Lijin Refinery China China 70.2 Apr-19 Jun-19 35 Exxon Mobil Corp ExxonMobil Joliet Refinery United States of America 238.6 Apr-19 Jun-19 61 Deutsche Shell AG Shell Wesseling Refinery Germany 141.0 May-19 Jun-19 13 LUKOIL PJSC Lukoil Perm Refinery Russia 93.9 Apr-19 Jun-19 54 Ineos Group Holdings Ltd Ineos Grangemouth Refinery United Kingdom 65.0 Apr-19 Jun-19 60 Ineos Group Holdings Ltd Ineos Grangemouth Refinery United Kingdom 35.0 Apr-19 Jun-19 60 Idemitsu Kosan Co Ltd Idemitsu Chiba Refinery Japan 190.0 Apr-19 Jun-19 42 Dansk Shell A/S Dansk Shell Fredericia Ref Denmark 31.5 May-19 Jun-19 30 PetroChina Co Ltd PetroChina Urunqi Refinery China 240.7 Apr-19 Jun-19 53 Bashneft PJSC Bashneft OAO Ufa Ref Russia 138.2 May-19 Jun-19 31 Repsol SA Reposol Cartagena Refinery Spain 100.0 Jun-19 Jun-19 1 Rosneft Oil Co PJSC Rosneft Achinsk Refinery Russia 105.0 May-19 Jun-19 42 Shell Canada Ltd Shell Sarnia Refinery Canada 37.5 May-19 Jun-19 43 China Petrochemical Corp Sinopec Wuhan City Refinery China 160.4 May-19 Jun-19 44 Source: Bloomberg, Edelweiss research
Edelweiss Securities Limited 58 Sector Update
Table 19: Announced maintenance outages in 2019 (contd.) Capacity Operator Refinery Region (mmbpd) Offline Restart Days offline Mariisky NPZ Ltd Mariisky NPZ Mari-El Refinery Russia 16.0 Jun-19 Jun-19 3 Shandong Huaxing Petrochemical GroupHuaxing Co Ltd Refinery China China 120.3 May-19 Jun-19 44 Rosneft Oil Co PJSC Rosneft Kornsomolsk Refinery Russia 126.0 May-19 Jun-19 37 Wynnewood Refining Co Wynnewood Refinery United States of America 74.5 Jun-19 Jun-19 2 Slavneft Oil & Gas Co OJSC Slavneft Yanos Refinery Russia 125.6 Apr-19 Jun-19 57 China Petroleum & Chemical Corp Sinopec Jinling Refinery China 160.4 Apr-19 Jun-19 61 Exxon Mobil Corp ExxonMobil Gravenchon Refinery France 17.5 Jun-19 Jun-19 1 Exxon Mobil Corp ExxonMobil Gravenchon Refinery France 41.3 Jun-19 Jun-19 1 BAYERNOIL Raffineriegesellschaft mbHBayernoil Vohburg Refinery Germany 60.0 Jun-19 Jun-19 12 Exxon Mobil Corp ExxonMobil Fos Refinery France 65.5 Jun-19 Jun-19 10 Shandong Boxing County Yongxin ChemicalYongxin Co RefineryLtd China China 60.2 Apr-19 Jun-19 62 Gazprom PJSC Gazprom Astrahan Refinery Russia 52.3 May-19 Jun-19 40 Showa Shell Sekiyu KK Showa Yokkaichi Refinery Japan 155.0 May-19 Jun-19 29 Cia Espanola de Petroleos SAU Cepsa Gibraltar Refinery Spain 117.0 Jun-19 Jun-19 9 Exxon Mobil Corp ExxonMobil Fawley Refinery United Kingdom 188.0 Jun-19 Jun-19 6 PetroChina Co Ltd PetroChina Lanzhou Refinery China 210.6 Apr-19 Jun-19 52 Repsol SA Reposol La Coruna Refinery Spain 60.0 Apr-19 Jun-19 56 United Refining Co US Refining Co Warren Refinery United States of America 65.0 Jun-19 Jun-19 8 Cosmo Oil Co Ltd Cosmo Yokkaichi Refinery Japan 85.0 Jun-19 Jun-19 6 Ruhr Oel GmbH PCK Schwedt Refinery Germany 71.5 May-19 Jun-19 38 Ruhr Oel GmbH PCK Schwedt Refinery Germany 37.0 May-19 Jun-19 38 China Petroleum & Chemical Corp Sinopec Luoyang Refinery China 160.4 Apr-19 Jun-19 65 Exxon Mobil Corp ExxonMobil Antwerp Refinery Belgium 76.8 May-19 Jun-19 40 Exxon Mobil Corp ExxonMobil Beaumont Refinery United States of America 365.6 Jun-19 Jun-19 1 Philadelphia Energy Solutions LLC PES Philadelphia Refinery United States of America 16.5 Jun-19 Jun-19 5 Marathon Petroleum Corp Marathon Martinez Refinery United States of America 105.0 Jun-19 Jun-19 21 TOTAL SA Total Elf Donges Refinery France 109.5 Apr-19 Jun-19 68 Valero Energy Corp Valero Memphis Refinery United States of America 30.0 Apr-19 Jun-19 61 Valero Energy Corp Valero Memphis Refinery United States of America 24.0 Apr-19 Jun-19 61 Agip Petroli SpA ENI (Agip) Milazzo Refinery Italy 137.0 Jun-19 Jun-19 8 Shell & BP South African Petroleum RefineriesSapref Pty Ltd South Africa 180.0 May-19 Jun-19 59 Motor Oil Hellas Corinth Refineries SAMotor Oil Hellas Theodoroi Ref Greece 65.0 May-19 Jun-19 59 Motor Oil Hellas Corinth Refineries SAMotor Oil Hellas Theodoroi Ref Greece 110.0 May-19 Jun-19 59 Qingdao Anbang Refining & Chemical AnbangCo Ltd Refinery China China 26.1 Apr-19 Jun-19 73 BP PLC BP Rotterdam Refinery Netherlands 190.0 May-19 Jun-19 45 TOTAL SA Total Leuna Refinery Germany 136.2 May-19 Jul-19 46 BP PLC BP Toledo Refinery United States of America 40.0 May-19 Jul-19 61 Dongying Eastar Group Chemical Co LtdEastar Refinery China China 24.1 Mar-19 Jul-19 100 Mariisky NPZ Ltd Mariisky NPZ Mari-El Refinery Russia 12.9 Jun-19 Jul-19 20 Exxon Mobil Corp ExxonMobil Fos Refinery France 131.0 Jun-19 Jul-19 4 Repsol SA Reposol Cartagena Refinery Spain 120.0 Jul-19 Jul-19 1 TOTAL SA Total Feyzin Refinery France 109.0 Jun-19 Jul-19 18 Ineos Group Holdings Ltd Ineos Lavera Refinery France 210.0 Jul-19 Jul-19 3 Reliance Industries Ltd RIL Jamnagar DTA Refinery India 330.0 Jun-19 Jul-19 20 SLOVNAFT AS Slovnaft Bratislava Refinery Slovakia 55.0 Apr-19 Jul-19 70 Varo Holding SA Varo Cressier Refinery Switzerland 68.0 May-19 Jul-19 44 BP PLC BP Toledo Refinery United States of America 40.0 May-19 Jul-19 60 PetroChina Co Ltd Petrochina Jinzhou China 180.5 May-19 Jul-19 64 ERG Petroli SPA Lukoil ISAB Priolo North Ref Italy 124.0 Jun-19 Jul-19 27 JXTG Nippon Oil & Energy Corp JXTG Nippon Mizushima Refinery Japan 90.0 Apr-19 Jul-19 74 JXTG Holdings Inc JXTG Nippon Sakai Refinery Japan 135.0 May-19 Jul-19 55 JXTG Nippon Oil & Energy Corp JXTG Nippon Sendai Refinery Japan 145.0 Jun-19 Jul-19 29 Source: Bloomberg, Edelweiss research
59 Edelweiss Securities Limited
Oil & Gas
Table 19: Announced maintenance outages in 2019 (contd.) Capacity Operator Refinery Region (mmbpd) Offline Restart Days offline China National Petroleum Corp Liaoyang Petrochem Refinery China 180.5 Jun-19 Jul-19 39 HollyFrontier Corp HollyFrontier Tulsa East Ref United States of America 70.3 Jul-19 Jul-19 5 Lyondell Citgo Refining LP LyondellBasell Houston Ref United States of America 135.8 Jul-19 Jul-19 0 Petroleos de Venezuela SA PDVSA Cardon Refinery Venezuela 310.4 Jul-19 Jul-19 3 Rosneft Oil Co PJSC Rosneft Kuibyshev Refinery Russia 73.0 May-19 Jul-19 52 Rosneft Oil Co PJSC Rosneft Kuibyshev Refinery Russia 73.5 May-19 Jul-19 52 Shandong Hengrunde Petrifaction Co LtdHengrunde Refinery China China 34.1 Jun-19 Jul-19 30 Shandong Shtar Science & Technology ShtarGroup Refinery Co Ltd China China 46.1 May-19 Jul-19 56 Repsol SA Repsol Petronor Bilbao Ref Spain 140.0 May-19 Jul-19 52 PDVSA Petroleo SA PDVSA Amuay Refinery Venezuela 153.0 Jul-19 Jul-19 7 PDVSA Petroleo SA PDVSA Amuay Refinery Venezuela 95.0 Jul-19 Jul-19 7 PDVSA Petroleo SA PDVSA Amuay Refinery Venezuela 100.0 Jul-19 Jul-19 7 PDVSA Petroleo SA PDVSA Amuay Refinery Venezuela 225.0 Jul-19 Jul-19 7 Mariisky NPZ Ltd Mariisky NPZ Mari-El Refinery Russia 12.9 Jul-19 Jul-19 14 TOTAL SA Total Grandpuits Refinery France 101.0 Feb-19 Jul-19 142 Antipinsky NPZ ZAO Antipinsky Antipino Refinery Russia 70.3 Apr-19 Jul-19 84 Phillips 66 Phillips 66 Belle Chasse Ref United States of America 249.7 Jul-19 Jul-19 7 Attock Refinery Ltd Attock Rawalpindi Refinery Pakistan 11.6 Jun-19 Jul-19 29 Antipinsky NPZ ZAO Antipinsky Antipino Refinery Russia 15.5 May-19 Jul-19 61 China Petroleum & Chemical Corp Sinopec Qingdao Refinery China 240.7 May-19 Jul-19 60 Shandong Jincheng Petrochemical GroupJincheng Refinery China China 46.1 Jun-19 Jul-19 40 Antipinsky NPZ ZAO Antipinsky Antipino Refinery Russia 69.1 Apr-19 Jul-19 108 China Petroleum & Chemical Corp Sinopec Jingmen Refinery China 32.1 Jun-19 Jul-19 29 PBF Energy Inc Chalmette Refinery United States of America 95.0 Jul-19 Jul-19 12 PBF Energy Inc Chalmette Refinery United States of America 95.0 Jul-19 Jul-19 12 TOTAL SA Total Fina Lindsey Refinery United Kingdom 110.0 May-19 Jul-19 68 Vietnam Oil & Gas Group Vietnam Nghi Son Refinery Vietnam 200.0 Feb-19 Jul-19 179 Gazprom PJSC Gazprom Surgut Refinery Russia 84.0 Jul-19 Jul-19 29 Suncor Energy Inc Suncor Montreal Ref Canada 30.1 Apr-19 Jul-19 121 China National Petroleum Corp Harbin Petrochem Refinery China 90.2 Jun-19 Jul-19 49 Shandong Haihua Group Co Ltd Haihua Refinery China China 48.1 Mar-19 Jul-19 150 China Petrochemical Corp Sinopec Guangzhou Refinery China 314.9 Jul-19 Aug-19 31 Bashneft PJSC Bashneft OAO Novo Ufa Ref Russia 43.5 Jul-19 Aug-19 31 Bashneft PJSC Bashneft Ufaneftekhim Refinery Russia 31.4 Jun-19 Aug-19 61 Shandong Huifeng Petroleum ChemicalHuifeng Co Ltd Refinery China China 46.1 May-19 Aug-19 83 PetroChina Co Ltd PetroChina Changqing Refinery China 100.3 Jun-19 Aug-19 65 Dongying Lianhe Petrochemical Co LtdLianhe Refinery China China 84.2 May-19 Aug-19 79 Suncor Energy Inc Suncor Sarnia Refinery Canada 15.3 Apr-19 Aug-19 135 INA Industrija Nafte DD INA Sisak Refinery Croatia 44.0 Jan-19 Aug-19 230 Shandong Dongming Petrochemical GroupDongming Co Ltd Refinery China China 150.4 Jul-19 Aug-19 44 Philadelphia Energy Solutions LLC PES Philadelphia Refinery United States of America 200.0 Jun-19 Aug-19 65 Philadelphia Energy Solutions LLC PES Philadelphia Refinery United States of America 24.0 Jun-19 Aug-19 65 Suncor Energy Inc Suncor Edmonton Ref Canada 19.6 Jul-19 Aug-19 59 China Petroleum & Chemical Corp Sinopec Tianjin Refinery China 276.8 Aug-19 Sep-19 31 China National Petroleum Corp Yumen Refinery China 66.2 Jul-19 Sep-19 62 China Petrochemical Corp Dongxing Refinery China China 100.3 Jul-19 Sep-19 71 PetroChina Co Ltd PetroChina Daqing Refinery China 110.3 Aug-19 Sep-19 43 China National Petroleum Corp PetroChina Dashanzi Refinery China 320.9 Jul-19 Sep-19 62 Hellenic Petroleum SA Hellenic Elefsina Refinery Greece 100.0 Sep-19 Sep-19 28 Nigerian National Petroleum Corp Nigerian Harcourt Refinery Nigeria 150.0 Jul-19 Sep-19 88 Nigerian National Petroleum Corp Nigerian Harcourt Refinery Nigeria 60.0 Jul-19 Sep-19 88 Toa Oil Co Ltd Toa Oil Keihin Refinery Japan 70.0 Sep-19 Sep-19 29 Source: Bloomberg, Edelweiss research
Edelweiss Securities Limited 60 Sector Update
Table 19: Announced maintenance outages in 2019 (contd.) Capacity Operator Refinery Region (mmbpd) Offline Restart Days offline Cosmo Oil Co Ltd Cosmo Chiba Refinery Japan 75.0 Sep-19 Sep-19 29 Cosmo Oil Co Ltd Cosmo Osaka Refinery Japan 100.0 Sep-19 Sep-19 29 China Petroleum & Chemical Corp Sinopec Jinling Refinery China 180.5 Sep-19 Oct-19 30 China Petroleum & Chemical Corp Sinopec Jinling Refinery China 180.5 Sep-19 Oct-19 30 Shandong Kenli Petrochemical Group CoKenli Ltd Refinery China China 60.2 Sep-19 Oct-19 30 HollyFrontier Corp HollyFrontier Cheyenne Ref United States of America 48.0 Sep-19 Oct-19 27 Nigerian National Petroleum Corp Nigerian Kaduna Refinery Nigeria 110.0 Jul-19 Oct-19 95 Tupras Turkiye Petrol Rafinerileri AS Tupras Aliaga Izmir Refinery Turkey 72.9 Oct-19 Oct-19 19 Agip Petroli SpA ENI (Agip) Milazzo Refinery Italy 100.0 Sep-19 Oct-19 34 Motiva Enterprises LLC Motiva Port Arthur Refinery United States of America 323.0 Sep-19 Oct-19 47 Caspian Energy Inc SOCAR Heydar Aliyev Refinery Azerbaijan 160.0 Oct-19 Oct-19 30 MOL Corp MOL Szazhalmbatta Refinery Hungary 80.5 Sep-19 Oct-19 60 Shandong Qicheng Petroleum ChemicalQicheng Industry Refinery Co Ltd China China 70.2 Aug-19 Oct-19 72 Deutsche Shell AG Shell Godorf Refinery Germany 186.0 Sep-19 Oct-19 60 Shell Oil Co Shell Deer Park Refinery United States of America 275.0 Sep-19 Oct-19 36 Exxon Mobil Corp ExxonMobil Sriracha Refinery Thailand 170.0 Sep-19 Nov-19 61 Exxon Mobil Corp ExxonMobil Sriracha Refinery Thailand 174.0 Sep-19 Nov-19 61 Preem Raffinaderi AB Preem Lysekil Refinery Sweden 220.0 Sep-19 Nov-19 61 China Petroleum & Chemical Corp Sinopec Qilu Refinery China 300.8 Oct-19 Nov-19 31 Suncor Energy Inc Suncor Edmonton Ref Canada 9.8 Apr-19 Nov-19 226 Saras SpA Saras Sarroch Refinery Italy 99.0 Oct-19 Nov-19 45 Husky Energy Inc Husky Lima Refinery United States of America 177.0 Oct-19 Nov-19 45 PetroKazakhstan Inc PetroKazakhstan Shymkent Ref Kazakhstan 160.0 Oct-19 Nov-19 45 UNIPETROL as Unipetrol Litvinov Refinery Czech Republic 101.0 Nov-19 Nov-19 19 China Petrochemical Corp Sinopec Guangzhou Refinery China 104.3 Oct-19 Nov-19 50 China Petrochemical Corp Sinopec Anqing Refinery China 180.5 Oct-19 Nov-19 50 Galp Energia SGPS SA Galp Energy Sinces Refinery Portugal 220.0 Jul-19 Nov-19 128 Oman refineries and petrochemical CoOman LLC Sohar Refinery Oman 116.4 Oct-19 Nov-19 60 Tupras Turkiye Petrol Rafinerileri AS Tupas Izmit Refinery Turkey 110.5 Oct-19 Nov-19 60 TOTAL SA Total Normandy Refinery France 247.0 Sep-19 Nov-19 61 TOTAL SA Total Normandy Refinery France 98.0 Sep-19 Nov-19 61 Repsol SA Reposol Puertollano Refinery Spain 75.0 Nov-19 Dec-19 44 Chennai Petroleum Corp Ltd CPCL Chennai Refinery India 56.2 Jul-19 Dec-19 182 Chennai Petroleum Corp Ltd CPCL Chennai Refinery India 80.3 Jul-19 Dec-19 183 Chennai Petroleum Corp Ltd CPCL Chennai Refinery India 74.3 Jul-19 Dec-19 183 Zarubezhneft OAO Zarubezhneft Brod Refinery Bosnia & Herzegovina 60.2 Jan-19 Jan-20 357 China Petroleum & Chemical Corp Sinopec Maoming Refinery China 60.2 Dec-19 Jan-20 39 Valero Energy Corp Valero Memphis Refinery United States of America 80.0 Jan-20 Feb-20 31 Delek US Energy Inc Delek Big Spring Refinery United States of America 73.0 Feb-20 Mar-20 45 Neste Oyj Neste Porvoo Refinery Finland 206.0 Apr-20 May-20 59 TOTAL SA Total Leuna Refinery Germany 227.0 May-20 Jun-20 44 Nigerian National Petroleum Corp Nigerian Harcourt Refinery Nigeria 24.0 Oct-19 Jun-20 272 Nigerian National Petroleum Corp Nigerian Harcourt Refinery Nigeria 60.0 Oct-19 Jun-20 272 Saudi Aramco Total Refining & PetrochemicalAramco CoAl Jubail Refinery Saudi Arabia 200.0 Jan-20 Dec-20 364 Saudi Aramco Total Refining & PetrochemicalAramco CoAl Jubail Refinery Saudi Arabia 200.0 Jan-20 Dec-20 364 Republic of Cameroon SONARA Cape Limboh Refinery Cameroon 37.0 Jun-19 Dec-20 579 TOTAL SA Total Vlissingen Refinery Netherlands 148.0 Apr-20 Dec-20 274 Limetree Bay Terminals LLC Limetree St Croix Refinery Virgin Islands (U.S.A.) 200.0 Jan-20 Dec-20 30 Source: Bloomberg, Edelweiss research
61 Edelweiss Securities Limited
Oil & Gas
Oil prices, generally, do not affect refining margins
First off, we observe that higher oil prices do not necessarily translate to lower refining margins. While critics may argue that oil at USD100/bbl would cause GRMs to collapse, in a scenario with strong demand coupled with low demand elasticity of transport fuels, refiners generally have the wherewithal to pass through input price hikes and protect refining margins.
The golden age of refining margins (2001–07) materialised in the face of rising crude prices. Only a global demand slowdown coupled with a supply shock (geopolitical issues in the Middle East) would lead to a scenario of rising oil prices and contracting GRMs (refer to chart 89).
Additionally, regulatory changes have always distorted refining margins. For example, in 2006 and 2010, earlier iterations of the upcoming IMO regulations (2006: USA diesel regulation, 2010: Europe shipping fuel regulation) had lifted refining margins despite rising oil prices.
Chart 89: GRM and crude prices not always inversely correlated 175 12.0
140 9.6
105 7.2
70 4.8 Brent ($/bbl)Brent 35 2.4
0 0.0 3MMA (US$/bbl, SingaporeGRM
2007 2008 2009 2010 2011 2012 2013 2014 2015 2017 2018 2016 2019
Brent (LHS) Singapore GRM (RHS)
Source: Bloomberg, Reuters, Edelweiss research
IMO norm: A huge boost to middle-distillate cracks Under the new IMO regulations that take effect from 2020, maximum allowable sulphur content in shipping fuel will fall from currently 3.5% by weight to 0.5% globally. This would affect 5mmbpd of marine fuel (3.2mmbpd fuel oil, 1.5mmbpd gasoil). As a result, we estimate marine fuel oil demand would fall from 3.2mmbpd to 1.5mmbpd in 2020; consequently, we expect gasoil demand to spike in 2020 as shippers switch from fuel oil to gasoil (refer to figure 3).
In the long term, we expect shippers to invest in scrubbers; thus, out of 3mmbpd of HSFO demand that must be replaced, 1.8mmbpd would be scrubbed and 0.6mmbpd is incremental gasoil volume while the remaining 0.6mmbpd would be LSFO. As the spread between diesel and HSFO widens, scrubbers will become more economical and shippers would start switching to HSFO. As a result, diesel demand should fall by 2030, from the peak seen in 2020 (refer to chart 90).
Edelweiss Securities Limited 62 Sector Update
Fig. 3: Scrubbers likely to replace gasoil over long term Chart 90: Diesel demand to spike in 2020
5.6 0.5% Near-term Bunker quick solutions 0.3 0.4 0.2 0.3 Fuel Oil 4.2 1.5 2.1 HSFO with Marine 2.9 2.7 Flue Gas Gasoil 2.8 3.5% High (MGO)
Scrubbers (Mmbpd) 0.6 Sulfur Fuel 0.2 Oil (HSFO) 1.4 3.2 0.1 0.6 1.8 1.5 1 Other fuels 0.0 0.2 0.2 such as LNG 2017 2020 2025 2030 LPG HSFO Scrubbed HSFO LSFO Gasoil LNG
Source: FGE, Edelweiss research
Benchmark margins to rise to USD7.8/bbl by 2020 We expect Singapore GRM to rise by USD2.9/bbl over 2018 and touch USD7.8/bbl by 2020. While fuel oil cracks are expected to fall to USD-27/bbl and achieve coal parity by 2020, this would be offset by higher diesel cracks, which should rise by 46% over 2018 levels to USD21/bbl (refer to table 20).
However, as the spread between diesel and fuel oil widens to over USD400/tonne, we expect the payback period for scrubbers to fall to less than two years, which should boost scrubber purchases by shippers. As a result, we expect diesel cracks to moderate by 2023 (refer to figures 4 & 5).
Table 20: We expect Singapore GRM to rise to USD7.8/bbl by 2020 Product Slate % US$/bbl CY 2017 CY 2018 CY 2019E CY 2020E CY 2021E CY 2022E CY 2023E 19.5 Gasoline 12.0 6.3 10.0 14.0 12.0 11.0 10.0 37.4 Diesel 13.2 14.4 16.0 21.0 19.0 18.0 17.0 15.6 HSFO (5.4) (4.2) (12.0) (27.0) (25.0) (22.0) (21.0) 13.5 Jet/Kero 13.3 14.9 15.0 16.0 15.0 14.0 14.0 4.1 LPG (25.2) (23.8) (22.0) (19.0) (20.0) (20.0) (21.0) 6.5 Naphtha 0.2 (3.9) 0.1 0.2 0.1 0.0 0.0 Singapore GRM 7.2 4.9 7.2 7.8 6.8 6.5 6.1 Source: FGE, Edelweiss research
63 Edelweiss Securities Limited
Oil & Gas
Fig. 4: Diesel cracks likely to spike in 2020 while fuel oil cracks plunge
Source: FGE, Edelweiss research
Fig. 5: Scrubber payback period drops to less than two years as spread widens over USD350/tonne
Source: FGE, Edelweiss research
Markets pricing in effects of IMO 2020 regulation Forward markets have started reflecting widening of spreads between gasoil and fuel oil contracts. The two-year forward swaps for gasoil/fuel oil have widened to over USD330/tonne from around USD200/tonne in 2017 (refer to chart 89).
Edelweiss Securities Limited 64 Sector Update
Fig. 6: Swap spreads have widened to over USD330/tonne over the past year
Source: FGE, Edelweiss research
Additionally, sourer grades of crude are pricing I greater discounts in the forwards market as demand for fuel oil recedes. The Brent-Dubai spreads have widened to over USD7/bbl for the contract expiring in 2020 versus a discount of less than USD1/bbl at present (refer to figure 7). This would benefit Indian refiners the most, which tend to have the highest share of sour crudes in their input mix.
Fig. 7: Brent-Dubai spreads have widened for 2020 contracts versus spot
Source: FGE, Edelweiss research
Precedents to IMO 2020: US EPA, 2006 and Europe ECA, 2010 Under the US EPA, sulphur content in diesel was cut from 0.5% to ~0% due to which prices of ULSD started rising in 2005. As a result, the premium of ULSD widened versus HSD to USD1.5–2/bbl during 2005–08. However, as low sulphur distillate yield increased, the premium fell back to USD0.5/bbl (refer to chart 91).
65 Edelweiss Securities Limited
Oil & Gas
Under Europe ECA, sulphur content for shipping fuel oil was reduced from 3.5% to 1%, which caused the premium of LSFO versus HSFO widen to USD40/bbl versus USD20/bbl earlier. This premium again moderated to USD20/bbl by 2014 when LSFO supply picked up.
Chart 91: Spreads of European LSFO versus HSFO widened in 2011 to USD40/bbl 50
40
30
($/bbl) 20
10
0
09 10 11 13 14 12
09 10 11 12 13 14
09 10 12 13 14 11
------
------
------
Jan Jan Jan Jan Jan Jan
Sep Sep Sep Sep Sep Sep
May May May May May May Source: Bloomberg, Edelweiss research
Gasoline cracks to recover in FY20 The recent weakness in GRM (Q1FY20: USD3.5/bbl, down 56% from FY18) is mainly due to a collapse in light-distillate cracks (gasoline/naphtha), which have hit USD4.2/USD-10.1/bbl from an average of USD12/2 per bbl over the past few years (refer to chart 92). We examine the factors behind the collapse in light-distillate cracks below:
Gasoline: The global passenger vehicle market has entered a recession for the first time since 2009. Vehicle sales declined by over 3.5% in 2HCY18. China, which accounts for over 20% of global sales, has seen demand decline by over 10% since September, which has affected gasoline consumption (refer to figure 8). Chinese teapots, which are tailored towards gasoline production, are flooding global markets with gasoline, incentivised by export benefits and lower domestic demand (refer to chart 93). Consequently, light distillate inventories are at multi-year highs, taking a toll on product cracks.
We have started seeing early signs of a recovery in gasoline cracks with Chinese light vehicle sales rebounding in 1HCY19 (refer to figure 9). As a result, Chinese gasoline exports have whittled down, leading to doubling of gasoline cracks to USD9.6/bbl in Q2FY20.
Edelweiss Securities Limited 66 Sector Update
Fig. 8: Light-distillate stocks above upper band of Fig. 9: China’s gasoline exports surge in 2019 long-term range
Source: FGE, Edelweiss research
Chart 92: Benchmark GRMs collapsed in 2018 as gasoline and naphtha cracks slid 30.0
20.0
10.0
0.0 ($/bbl) (10.0)
(20.0)
(30.0)
2008 2008 2009 2009 2010 2010 2011 2012 2012 2013 2013 2015 2015 2016 2017 2017 2018 2019 2014 2016
Gasoline cracks Singapore GRM Naphtha cracks
Source: Bloomberg, Reuters, Edelweiss research
67 Edelweiss Securities Limited
Oil & Gas
Chart 93: Chinese LV sales decline 10% in 2H18, pushing up gasoline exports 3.5 1,800
2.8 1,440
2.1 1,080
1.4 720 (KT) (Mn)
0.7 360
0.0 0
15 16 17 19 14 18
14 15 16 18 19 17
------
------
Jul Jul Jul Jul Jul Jul
Jan Jan Jan Jan Jan Jan
China PV Sales China Gasoline Exports ('000 Tonnes) Source: Bloomberg, Edelweiss research
Naphtha: With the new ethane crackers starting up in the US, petchem feedstock demand for naphtha has declined, leading to a significant rise in naphtha exports from the US (refer to figure 10). Additionally, lower LPG prices have also incentivised Asian crackers to shift from naphtha to LPG, leading to lower demand (refer to figure 11).
Fig. 10: US naphtha exports spike in 2018 Fig. 11: Adverse naphtha-LPG spread affecting demand
*Chart 97: Units in $/ton Source: FGE, Edelweiss research
However, FGE expects light distillate cracks to recover in 2HCY19. According to oil economics expert Dr. Fesharaki, naphtha cracks will turn positive in 2H19 as Asian petchem feedstock demand strengthens seasonally in 2Q19. Additionally, startup of new crackers in Saudi Arabia and Iran will absorb the higher naphtha exports and support spreads in 2019.
FGE also expects gasoline cracks to recover from 2HCY as the driving season kicks in. China’s gasoline exports will remain elevated in 1Q19 due to weak demand and elevated refinery runs. 2017 was a record year for Chinese LV sales due to a rebate on sales tax; as a result,
Edelweiss Securities Limited 68 Sector Update
2HCY18 witnessed a sharp contraction. We expect volumes may have troughed in 2018 and will rebound from 2H19 off a low base amid a cyclical recovery.
Oil range-bound: USD60–70/bbl in 2019 Oil prices have retreated over 30% from the highs of USD85/bbl seen in October and are currently around USD60/bbl (refer to figure 12). This was primarily due to higher supply as OPEC cuts expired and demand weakened, resulting in higher inventory stocks.
Despite the recent renewal of OPEC+ cuts (OPEC: 0.8mmbpd, non-OPEC: 0.4mmbpd), oil prices have failed to recover to previous highs and continue to trade around USD60/bbl (refer to figures 13 & 14 and table 21). We believe the efficacy of these cuts is limited and will be diluted by rising production at member countries; consequently, compliance will continue to fall short of expectations.
Fig. 12: Oil prices to remain within USD60–70/bbl through 2023
Source: FGE, Edelweiss research
69 Edelweiss Securities Limited
Oil & Gas
Fig. 13: US production to rise by 2mmbpd in 2019... Fig. 14: ...but likely to be partially offset by 1mmbpd dip in Iran exports
Source: FGE, Edelweiss research
Table 21: We expect flattish inventory levels in 2019, leading to range-bound oil prices Mmbpd 1Q18 2Q18 3Q18 4Q18 2,018 1Q19 2Q19 3Q19 4Q19 2019 DEMAND 100.7 99.9 101.3 101.4 100.8 101.4 100.8 102.6 102.9 102.0 NON OPEC SUPPLY 62.4 62.6 63.8 65.1 63.5 64.9 64.6 65.5 66.6 65.4 OPEC SUPPLY 37.8 37.8 38.2 38.3 38.0 37.2 36.3 36.6 36.6 36.6 SUPPLY 100.2 100.4 102.0 103.5 101.5 102.1 100.9 102.0 103.1 102.0 Implied Stock Change (0.4) 0.5 1.0 1.2 0.6 (0.0) (0.9) (0.9) 0.9 (0.2) Source: FGE, Edelweiss research
Edelweiss Securities Limited 70 Sector Update
COMPANIES
71 Edelweiss Securities Limited
COMPANY UPDATE
INDIAN OIL CORPORATION Best bang for the buck
India Equity Research| Oil, Gas and Services COMPANYNAME
Indian Oil Corporation (IOCL) is our top pick amongst Oil Marketing EDELWEISS 4D RATINGS Companies (OMCs). Key highlights: 1) We estimate GRM to rise 65% to Absolute Rating BUY USD8.9/bbl by FY21E led by stabilisation of the highly complex Paradip refinery, higher diesel cracks (IMO) and recovery in gasoline cracks; 2) This Rating Relative to Sector Outperform will be the primary driver of robust 62% refining EBITDA CAGR over FY19- Risk Rating Relative to Sector Medium 21E and RoE to 19% by FY21E 3) Diversification into petrochemicals and Sector Relative to Market Equalweight pipelines has led to lowest exposure (23% of EBIDTA) to volatile marketing earnings among OMC; and 4) Dividend yield at 7.4% FY21E is compelling. MARKET DATA (R: IOC.BO, B: IOCL IN) Moreover, valuation at 4.4x FY21E EV/EBITDA is barely at half the long- CMP : INR 124 term average and cheapest among OMCs despite lowest debt and highest Target Price : INR 182
FCF. Our Gordon Growth Model reflects a negative 2.5% terminal growth. 52-week range (INR) : 171 / 105 Maintain ‘BUY’ with revised SOTP-based TP of INR182 (INR174 earlier). Share in issue (mn) : 9,414.2 M cap (INR bn/USD mn) : 1,169 / 16,352 Higher GRM, Paradip stabilisation to drive earnings Avg. Daily Vol.BSE/NSE(‘000) : 14,422.0
Paradip, despite having one of the highest Nelson’s complexity index (NCI) in India (12.2), SHARE HOLDING PATTERN (%) continues to record sub-par GRM at USD4.5/bbl (FY19) due to high fuel losses (10.9%) and lower diesel slate (41%). However, as the HDC stabilises and heavy crude sourcing Current Q4FY19 Q3FY19 ramps up, we expect GRM at Paradip to double to USD10/bbl, similar to other complex Promoters * 52.2 52.2 54.1 refineries. Along with higher diesel cracks due to IMO and a cyclical recovery in gasoline MF's, FI's & BK’s 13.2 13.8 13.6 cracks, we expect higher GRM to drive refinery EBITDA by 62% CAGR over FY19-21E. FII's 7.7 7.0 5.6 Others 26.9 27.0 26.8 * Promoters pledged shares : NIL Annuity pipeline earnings a cushion; high rural retail profitability (% of share in issue) With IOCL deriving ~20% of EBITDA from pipelines and petchem each, it has the least exposure to marketing (23%) among OMCs. The company has an extensive rural retail PRICE PERFORMANCE (%) network (7879 outlets), constituting 14% of diesel & gasoline sales. Although rural EW O & G Stock Nifty throughput is 60% lower than urban/highways, IRRs are superior due to lower Index investments. With the PP plant at Paradip commencing operations in Q2FY20 and further 1 month (15.4) (8.1) (12.9) expansion by FY23E, profitability will improve as petchem is a higher ROCE business. 3 months (16.1) (5.6) (16.4) 12 months (22.7) (4.7) (16.3)
Outlook and valuation: Highest value for money; maintain ‘BUY’
Despite the highest profitability and greatest stability in earnings among OMCs, IOCL quotes at a 40% discount to its historic average and 20% discount to BPCL. A dividend yield of 7.4% provides a valuation floor. We maintain ‘BUY/SO’ with TP of INR182. Key risks: Government stake sale overhang, delay in stabilisation of Paradip refinery and regulatory interference in marketing margin.
Financials (INR mn)
Year to March FY18 FY19 FY20E FY21E Jal Irani Net revenue 4,214,918 5,281,489 5,185,179 5,370,664 +91 22 6620 3087 EBITDA 415,932 352,227 393,192 466,263 [email protected] Adjusted Profit 221,895 173,768 187,321 233,782 Vijayant Gupta Adjusted diluted EPS (INR) 23.5 18.4 19.8 24.8 +91 22 4040 7402 Diluted P/E (x) 5.4 6.8 6.4 5.1 [email protected]
EV/EBITDA (x) 4.3 5.8 5.2 4.4 ROAE (%) 20.6 15.0 16.1 18.6 August 22, 2019 Edelweiss Research is also available on www.edelresearch.com, Edelweiss Securities Limited Bloomberg EDEL
Indian Oil Corporation
Refinery expansion to be back-ended towards FY21 We expect close to 5MT of additional refinery capacity during FY21E, spread across Mathura, Koyali and Haldia. Volume growth will pick up from FY21E as major capacity expansions at Panipat (10MT) and Paradip (5MT) are implemented (refer to chart 1). We expect petchem capacity to double by FY23E following ramp-up of Paradip capacity; the 0.7MTPA Phase 1 polypropylene plant is scheduled to be commissioned during Q2FY20 followed by a 0.4MTPA MEG (polyester intermediate) plant. In the third stage, IOCL will set up a 1.2MPTA aromatics complex (PX/PTA) at Paradip, which should be commissioned by FY23E (refer to table 1).
Chart 1: Koyali/Barauni expansion will add to Table 1: Petchem capacity will double post Paradip start-up refining capacity from FY21 onwards 100 10.0 Petchem capacity (MMT, current/future) IOCL BPCL HPCL Current 2.0 0.0 0 80 9.0
Upcoming (FY19-25E) 60 8.0 Paradip 2.3 Kochi 0.5 40 7.0 ($/bbl)
Mumbai 2.0 Capacity (MMT) Capacity 20 6.0 Bina 1.5 Barmer 3.0 0 5.0 FY17 FY18 FY19 FY20EFY21EFY22EFY23E Bhatinda 2.0 MRPL 1.0 Digboi Guwahati Bongaigaon Haldia Barauni Mathura Total 4.3 4.0 6.0 Koyali Paradip Panipat Source: Company, Edelweiss research Source: Company, Edelweiss research
Highest GRM among OMCs With one of the highest distillate yields as well as excise benefits at North Eastern refineries, IOCL has the highest GRM among OMCs (FY19: USD5.4/bbl, BPCL: USD4.6/bbl, HPCL: 5.0/bbl). Furthermore, we believe, GRM at Paradip refinery has additional upside— while fuel losses are elevated at 10.9% and will be reduced as the refinery stabilises, high speed diesel’s (HSD) share in the product slate can be increased from the current 41% as hydrocracking capacity expands (refer to chart 2). Heavy crude sourcing is also at sub- optimal levels; as heavy crude share increases, this can add further upside to GRM. As the PP plant ramps up, propylene output from the refinery will also increase, significantly boosting refining margin.
Although throughput will increase in FY21E by 6%, the primary driver of refining earnings over the outlook period will be rise in GRM (65% over FY19-21E). GRM recovery will be led by surge in diesel cracks due to IMO along with recovery in gasoline cracks as Chinese gasoline exports ebb due to stabilisation of domestic demand (refer to table 2).
73 Edelweiss Securities Limited Oil, Gas and Services
Table 2: GRM to rise 65% by FY21 led by surge in gasoline and diesel cracks Product Slate % Product (New, from CY 2021) Slate % US$/bbl CY 2017 CY 2018 CY 2019E CY 2020E CY 2021E CY 2022E CY 2023E 18.7 14.7 Gasoline 12.0 6.3 10.0 14.0 12.0 11.0 10.0 50.0 45.7 Diesel 13.2 14.4 16.0 21.0 19.0 18.0 17.0 0.0 4.2 HSFO (5.4) (4.2) (12.0) (27.0) (25.0) (22.0) (21.0) 9.2 9.2 Jet/Kero 13.3 14.9 15.0 16.0 15.0 14.0 14.0 4.6 4.6 LPG (25.2) (23.8) (22.0) (19.0) (20.0) (20.0) (21.0) 5.7 5.7 Naphtha 0.2 (3.9) 0.1 0.2 0.1 0.0 0.0 IOCL 8.5 5.4 8.3 8.9 8.7 8.8 8.9 Source: FGE, Edelweiss research Note: CY2020 refers to year ending Mar’21 for OMC’s
Chart 2: IOCL’s Paradip, despite NCI of 12.2, lies below the spectrum; we expect Paradip GRMs to double
HMEL, Bhatinda The sweet spot: High distillate, High GRM 12.2 NRL, Numaligarh RIL, Jamnagar BORL, Bina
10.4 IOC, Koyali
HPCL, Mumbai EOL, Vadinar
GRM, $/bblGRM, 8.6 IOC, Digbol MRPL, Mangalore IOC, Panipat IOC, Mathura IOC, Haldia IOC, Guwahati BPCL, Mumbai 6.8 IOC, Paradip IOC, Barauni HPCL, Vishak IOC, Bongaigaon CPCL BPCL, Kochi
5.0 40.0 45.0 50.0 55.0 60.0 65.0 70.0 75.0 80.0 85.0 90.0
Distillate yield (%) Distillate yield= gasoline+diesel+jet fuel+kerosene-fuel losses Source: MoPNG, Edelweiss research
Refining to drive growth IOCL, currently the only player with a petchem plant, has the lowest exposure to marketing among OMC. As GRM expands, we estimate refining EBITDA to post 62% CAGR during FY19- 21E (refer to charts 3 &4); consequently, we expect the share of refining to grow to 50% by FY21E from 24% in FY19.
74 Edelweiss Securities Limited Indian Oil Corporation
Chart 3: Refining EBITDA to post 62% CAGR during FY19-21E Chart 4: Share of refining EBITDA to rise to 50% by FY21E 250 13.0 100%
190 10.0 80%
130 7.0 60%
40% 70 4.0
EBITDA margin (%) margin EBITDA 20% EBITDA Share (%) Share EBITDA Refining EBITDA (INR Bn) (INR EBITDA Refining 10 1.0 0%
(50) (2.0)
FY14 FY15 FY16 FY17 FY18 FY19 FY21E
-20% FY20E
FY15 FY19 FY14 FY16 FY17 FY18 FY21E FY20E Refining Marketing Pipelines Petchem EBITDA (INR Mn) EBITDA Margin
Source: Company, Edelweiss research
Based on our sensitivity analysis, while a 10% change in GRM will impact overall EBITDA by 8%, a 10% change in marketing margin will lead to 10% change in EBITDA (refer to table 3). IOCL has the lowest sensitivity to GRM as the company also derives significant chunk (over 20%) of earnings from petrochemicals. The company also has the highest refining/marketing output ratio. Consequently, marketing and refining betas are broadly equal (refer to chart 5).
Chart 5: GRM to jump 65% over FY19 Table 3: A 10% change in GRM leads to 8% change in EBITDA 12.0 % Change in EBITDA GRM Change -20% -10% 0% 10% 20% -20% -44 -36 -28 -20 -12 9.6 Marketing -10% -26 -18 -10 -2 6 margin 0.0% -16 -8 0 8 16 7.2 change 10% -6 2 10 18 26 20% 16 24 32 40 48
4.8 GRM ( $/bbl) ( GRM
2.4
0.0
FY12 FY15 FY11 FY13 FY14 FY16 FY17 FY18 FY19
FY20E FY21E IOCL BPCL HPCL
Source: Company, Edelweiss research Source: Company, Edelweiss research
75 Edelweiss Securities Limited Oil, Gas and Services
Paradip: Energy gateway to East India The refinery complex is the most modern and one of the most competitive in the world with high Nelson complexity, advantaged crude sourcing and superior product configuration. The mega 15MMT single CDU column is favourably integrated with state-of-the-art secondary product units, maximising yield of high-value accretive products (refer to table 4). The complex is supported by a strong infrastructure of pipelines, port, rail and road facilitating highly efficient end-to-end movement of liquids from crude procurement to products placement. Also, the refinery has a captive 365MW power plant.
The refinery is highly competitive compared to other similar domestic refineries and is expected to clock significantly higher core GRM along with highest operational efficiencies, in turn driving profitability.
The refinery is running at full capacity, although we believe GRM can expand from current level as fuel losses reduce and diesel/propylene yield expands.
Table 4: Paradip—One of the most competitive refineries; boasts of high complexity, distillate yield with strong GRM/profitability Factors Paradip Bhatinda Bina RIL Jamnagar RIL SEZ RIL Overall Complexity 12.2 12.0 10.8 11.3 14.0 12.7 Light distillate (%) 25.1 24.7 21.2 25.3 34.5 32.0 Middle distillate (%) 47.5 49.1 62.6 36.9 48.0 45.0 Fuel & loss (%) 10.9 6.3 9.7 8.4 8.2 8.2 GRM (USD/bbl) 7.0 13.0 11.7 - - 11.6 Opex (USD/bbl) 2.0 2-2.5 - - 1.8 ROCE (%) 11.0 17.0 15.0 Note: Data as of FY18 Source: PPAC, Company, Edelweiss research
Key factors driving competitive advantage: 1. High complexity driving crude advantage Paradip has a high Nelson complexity of 12.2 versus BPCL’s Bina refinery at 10.8 and HPCL’s Bhatinda refinery at 12.0; RIL’s overall complexity factor includes benefits of petrochemical integration. Paradip’s further expansion to polypropylene (INDMAX technology in FCC unit) by Q2FY20 will further enhance refining complexity.
Configured with 15MMT crude and vacuum unit, the high complexity can be attributed to major secondary processing units like INDMAX—Fluidised Catalytic Cracker (FCC), Delayed Coking Unit (DCU) for coke production, Diesel Hydro-treatment and Catalytic Reformer Unit (CRU), Alkylation unit, etc., for quality upgradation of products (refer to table 5).
High complexity imparts capability to process a broad basked of crude including cheaper high-sulphur heavy crude oils (40% Maya, 60% Kuwait export crude). The onstream factor of Paradip is 95% (8,320hrs/year) compared to 91.3% (8,000hrs/year) of most other refineries.
76 Edelweiss Securities Limited Indian Oil Corporation
Table 5: Paradip’s secondary process units—State-of-the-art technologies from international licensors Process units Capacity Company Atmospheric and Vacuum Distillation unit (AVU) 15 MMTPA Open Art, FW USA Diesel Hydrotreating Unit (DHDT) 5.2 MMTPA Shell Global, The Netherland VGO Hydrotreating Unit (VGO-HDT) 5.4 MMTPA Axens, France INDMAX (Fluidized Catalytic Cracking Unit) 4.17 MMTPA IOC-R&D & ABB Lummus Delayed Coking Unit DCU) 4.4 MMTPA Foster Wheeler, USA Alkylation Unit 650 TMTPA ExxonMobil, USA Butane Isomerization Unit (Butamer) 36 MT/Hr UOP LLC, USA Naphtha Hydrotreating / Catalytic Reforming Unit (NHT/CCR) 3.9/2.9 MMTPA UOP LLC, USA Propylene Recovery Unit (PRU) 1.9 MMTPA Basell, Italy Sulphur Recovery Unit (SRU) 2 X 525 TPD Black & Veatch, USA Sulphuric Acid Regeneration Unit (SARU) 185 TPD MECS, USA Flue Gas Desulphurisation Unit (FGD) 1.5 mn Nm3/Hr Cansolv Technologies, Canada ATF Treatment Unit 1.2 MMTPA Merichem, USA FCC Light Naphtha Treatment Unit 0.4 MMTPA Merichem, USA FCC LPG Treatment Unit 1.85 MMTPA Merichem, USA Straight Run LPG Treating Unit 0.21 MMTPA UOP LLC, USA Amine Regeneration Unit (ARU) Train - I/II 455/899 m3/Hr Open Art, FW USA 3 Sour Water Stripper (SWS) Train - I/II 398/229 m /Hr Open Art, FW USA Source: Company, Edelweiss research
2. Superior product configuration
The refinery has a high distillate yield of 72.6%, comparable with modern domestic refineries, with zero fuel oil and full conversion of naphtha to value-accretive high-octane reformates. The products, MS and HSD, have Euro IV quality. The refinery is designed to produce MS with 95 RON and premium diesel with ultra-low sulphur of 10ppmw for exports to advanced countries. Propylene produced will be of polymer grade quality. The refinery will also be Euro VI compliant by the notified deadline (refer table 6).
Fuel & loss is higher partly because of the complexity factor since it consumes more products internally (like naphtha for complete internal consumption in CRU). We expect fuel loss to further moderate in the future.
Table 6: Paradip’s product pattern—High middle and light distillates, zero fuel oil Production (TMT) As % of overall LPG 819 6.4 Motor Spirit 2,370 18.5 Naphtha 11 0.1 Aviation Turbine Fuel 526 4.1 Superior Kerosene Oil 250 1.9 High Speed Diesel 5,268 41.0 Furnace Oil 0 0.0 Bitumen 0 0.0 Lube Oil 0 0.0 Petrleum Coke 1,088 8.5 Others 1,115 8.7 Fuel & losses 1,393 10.8 Total 12,840 100.0 Source: Company, Edelweiss research
77 Edelweiss Securities Limited Oil, Gas and Services
3. Efficient crude procurement, storage and product placement The crude is imported through VLCC, unloaded through SPMs and transferred to crude oil storage tanks via dedicated crude pipelines. During rough seas when SPMs are not expected to be operational, the crude is received through Suezmax tankers at the exclusive South Oil Jetty, constructed within the Paradip port.
Products from the refinery are being sent to local and domestic markets through road, sea and pipelines. The South Jetty is constructed and fully operational to cater to the needs of petroleum products in domestic and deficit markets of the Asia-Pacific region, Europe and US.
While crude is stored in 11 tanks with combined capacity of 550,000tonnes, the finished product is stored in 25 tanks and 15 mounded bullets of different size as per requirement.
4. Pipeline till Raipur will be expanded to Ranchi and Hyderabad The Paradip-Ranchi-Raipur pipeline is running at full capacity to evacuate about 3.75MMT product from refinery. Currently, the pipeline is operational from Paradip to Ranchi and operations will be extended till Hyderabad by January 2020. This 1,108km pipeline with intermediate pumping stations will ensure uninterrupted supply of products to vast parts of Andhra Pradesh.
IOCL is also constructing a 710km Paradip-Haldia-Durgapur LPG pipeline, which will facilitate cost-effective LPG transportation from Paradip and Haldia to LPG bottling plants at Balasore, Budge-Budge, Kalyani and Durgapur.
5. Material upside for GRM and profitability post stabilisation While Paradip ranks at par with the most advanced refineries in India in terms of complexity, it still lags other refineries in terms of GRM. This is primarily due to low utilisation of secondary units (FCC treatment unit, HDC, propylene plant) which leads to a lower share of products with higher cracks.
Additionally, product offtake is also limited due to limited evacuation capacity. Management expects stabilisation of secondary units and commissioning of pipeline projects by FY20 to materially boost GRM (refer to chart 6).
78 Edelweiss Securities Limited Indian Oil Corporation
Chart 6: GRM, opex trend—Paradip lags other refiners with comparable complexity 12.0 3.0
10.0 2.6 8.0 2.2
6.0 ($/bbl) ($/bbl) 1.8 4.0
2.0 1.4
0.0 1.0 Paradip Bhatinda Bina RIL
GRM Opex
Data as of FY19 Source: Company, Edelweiss research
6. To contribute 18% to FY21E EBITDA On full capacity utilisation, we estimate Paradip to generate incremental EBITDA of INR38bn, adding ~18% to overall EBITDA (refer to table 7). We expect GRM uptick (USD4.5/bbl to USD10.0/bbl) led by higher product cracks, higher share of diesel/propylene in product slate and higher share of heavy crude sourcing.
Table 7: Paradip will incrementally contribute 18% to EBITDA post GRM upgradation Impact of full utilization at Paradip Refinery INR mn GRM ($ 4.5/bbl to $10/bbl) 42,331 Less:Incremental Opex 3,848 Incremental EBITDA 38,483 FY21E Refining EBITDA 216,667 % FY21 EBITDA 17.8 Source: Company, Edelweiss research
7. Future projects: PP and PX projects to further enhance competitiveness As LPG-propylene yield is maximised by INDMAX technology in FCC, propylene will act as a feed for the 700ktpa polypropylene (PP) plant which has become operational during H1FY20.
Paradip has also got approval for the ethylene derivative project which is targeting 400ktpa of MEG at a cost of INR37.5bn. Additionally, a PX/PTA plant is being set up in the vicinity of 1.2MMTPA capacity (refer to chart 7).
79 Edelweiss Securities Limited Oil, Gas and Services
Chart 7: PP plant at Paradip will boost petchem EBITDA by 26%
55,289
36,860
18,430 Petchem EBITDA (INR Mn) (INR Petchem EBITDA
- FY19 EBITDA PP Contribution FY20E EBITDA
Source: Company, Edelweiss research
Marketing: Rural exposure augurs well IOCL has 27,742 fuel retail outlets with 7,879 rural outlets (KSKs) and 19,863 outlets in urban areas/highways. The company has larger exposure to rural retail, representing 29% of its total outlets compared to HPCL (23%) and BPCL (15%), and rural outlets contribute 14% to its petrol and diesel sales. Though throughput per outlet (TPO) in rural outlets is lower at 80kl/month compared to 180-190kl/month in urban areas, they clock higher returns (IRR) as investments are significantly lower and margins are superior (refer to chart 8).
Notably, rural TPO has surpassed IOCL’s targets by 250% as the company has created high entry barriers through investments in: 1) non-fuel retail: IOCL’s rural outlets offer value-added services (VAS) like seed/fertiliser sales, banking services and FMCG sales; and 2) solarisation: ~5,000 of the company’s outlets (3,000 of which are rural) derive continuous power from solar energy, leading to continuous servicing, thereby encouraging higher footfalls.
Overall, IOCL dominates the fuel retail market with 47% (volume) market share. The company’s overall FY19 TPO stands at 182kl/month (BPCL’s at 193kl and HPCL’s at 143kl). Notably, it has higher TPO than HPCL despite large rural presence (where throughputs are lower).
80 Edelweiss Securities Limited Indian Oil Corporation
Chart 8: IOCL‘s rural-heavy retail outlet portfolio (May 2019) 100.0
80.0
60.0 (%) 40.0
20.0
0.0 IOCL BPCL HPCL
Rural Urban/ Highways
Source: PPAC, Edelweiss research
Pipeline expansion in South and East India We estimate pipeline capex of INR200bn over FY19-23E as IOCL expands network in South and East India. The Barauni-Haldia-Paradip and Ennore-Trichy-Madurai corridors are key focus areas for the company (refer to figure 1). Post expansion, we expect the network to rise to over 20,000km (14,189km currently) with throughput rising to 120MTPA (94MTPA currently). IOCL has the largest pipeline network in India with sufficient capacity to carry the entire crude input; as a result, we expect IOCL has the lowest transportation costs among Indian OMCs.
81 Edelweiss Securities Limited Oil, Gas and Services
Fig. 1: Pipeline network will rise to 20,000km (120MTPA) post completion
Source: Company, Edelweiss research
Aggressive CGD entry IOCL (standalone) has been the largest beneficiary of the recent city gas distribution (CGD) auctions; along with JVs formed with Adani Gas and GAIL (Green Gas), the company has won 29 geographical areas (GAs), accounting for 21% of the GAs on offer. In the 10th round, IOCL has won some of the largest GAs in Bihar and Jharkhand; we estimate the company to potentially connect 4mn households, accounting for 20% of the total PNG connections (refer to table 8).
82 Edelweiss Securities Limited Indian Oil Corporation
Table 8: IOC has won the most GAs across both rounds Number of S.No Name of Bidder Geographical Areas 10th Round 9th Round Total 1 Indian Oil Corporation Limited 9 8 17 2 Adani Gas Limited 2 13 15 3 Bharat Gas Resources Limited 2 11 13 4 Torrent Gas Private Limited 3 10 13
5 AG&P LNG Marketing Pte. Ltd. 9 3 12
6 Hindustan Petroleum Corporation Limited 9 1 10
7 Indian Oil Adani Gas Private Limited 1 9 10 8 GAIL Gas Limited 4 5 9 9 Gujarat Gas Limited 6 1 7 10 Consortium of Think Gas Investments Pte. Ltd 1 4 5 11 Indraprastha Gas Limited 3 1 4 12 Megha Engineering & Infrastructures Limited 0 4 4 13 Maharashtra Natural Gas Limited 0 3 3 14 Consortium of Assam Gas Company Limited, Oil 0 2 2 India Limited and GAIL Gas Limited 15 Consortium of Haryana City Gas Kapil Chopra 0 2 2 Enterprise & Rati Chopra 16 Green Gas Limited 0 2 2 17 Tripura Natural Gas Company Limited 0 2 2 18 Unison Enviro Private Limited 0 2 2 19 Consortium of SKN Haryana City Gas 0 1 1 Distribution Pvt. Ltd and Chopra Electricals 20 Essel Gas Company Limited 0 1 1 21 IRM Energy Private Limited 0 1 1 22 Rajasthan State Gas Limited 1 0 1 Total 50 86 136 Source: PNGRB, Edelweiss research
83 Edelweiss Securities Limited Oil, Gas and Services
Significant surge in capex on refining/marketing expansion During FY14-18, IOCL incurred INR880bn capex, primarily across refining and marketing. Over FY19-23E, we expect capex to ramp up significantly to INR1,370bn predominantly due to refining and marketing expansion (refer to table 9). Paradip petchem plant will require additional investment of INR160bn, while IOCL’s CGD arm has won 29 GAs during the 9th and 10th rounds of bidding. Refining and marketing will continue to account for bulk of the capex as the company is planning to double its retail network and expand refining capacity by 25% over the next five years (refer to chart 9 and table 10) .
Table 9: R&M will continue to take up bulk of capex Chart 9: Capex will surge to INR1.4tn over FY19-23E Capex Projection (INR Bn) Project FY19E-FY23E 400 0.8 Refining Panipat Expansion 230 300 0.6 Bottom upgradation 40 Euro-6 upgradation 40 200 0.5 Paradip Expansion 150
Other expansions 200 100 0.3 (%)
Total 660 Bn) (INR Petchem 0 0.2 Paradip 160 Marketing (100) 0.0
Maintenance/expansion 300
FY18 FY19
Pipelines FY17
FY22E FY20E FY21E FY23E Expansion 200 JV Capex Free cash flow Net Debt/Equity CGD 50 Total 50 Total 1,370 Source: Company, Edelweiss research Source: Company, Edelweiss research
84 Edelweiss Securities Limited Indian Oil Corporation
Table 10: Capacity commissioning in FY21E will boost IOCL’s refining throughput FY19-23 FY16 FY17 FY18 FY19 FY20E FY21E FY22E FY23E CAGR (%) Refining Througput (MMT) IOCL 58.0 65.2 69.0 71.8 70.4 74.9 77.9 82.9 3.6 BPCL 24.1 25.4 28.5 31.0 30.3 31.1 31.1 31.1 0.0 HPCL 17.2 17.8 18.2 18.5 17.8 20.2 28.2 28.2 11.1 Throughput Growth (yoy,%) IOCL 8.3 12.4 5.8 4.1 (2.0) 6.4 4.0 6.4 BPCL 3.3 5.3 12.4 8.7 (2.4) 2.6 0.0 0.0 HPCL 6.5 3.3 2.2 1.6 (3.7) 13.6 39.1 0.0 GRM ($/bbl) IOCL 5.1 7.8 8.5 5.4 8.3 8.9 8.7 8.8 12.9 BPCL 6.6 5.3 6.9 4.6 7.2 7.8 7.3 7.5 13.1 HPCL 6.7 6.2 7.4 5.0 7.2 7.8 7.5 7.7 11.3 Marketing sales volume (MMT) IOCL 76.1 78.8 84.3 85.1 86.5 89.5 93.0 96.3 3.1 BPCL 38.4 40.2 43.2 45.0 46.1 48.0 50.2 52.2 3.8 HPCL 34.2 35.2 36.9 38.7 40.0 41.9 43.9 45.8 4.3 Volume Growth (%) IOCL (0.5) 3.6 7.0 0.9 1.6 3.5 3.9 3.5 BPCL 4.8 4.6 7.5 4.1 2.4 4.3 4.5 4.0 HPCL 7.1 3.0 4.8 4.8 3.3 4.7 4.9 4.3 Core Marketing margin (INR/ltr) IOCL 3.8 3.5 3.9 4.6 4.2 4.4 4.6 4.9 1.5 BPCL 4.5 3.6 3.7 4.6 4.2 4.4 4.6 4.8 1.2 HPCL 3.4 3.9 3.6 4.4 4.0 4.2 4.4 4.6 1.3 Source:Companies, Edelweiss research
Compelling valuations; re-rating imminent With FY21E EV/EBITDA of 4.4x and FY21E PER of 5.1x, IOCL is trading at 40% discount to its long-term average (refer to chart 10). With FY20E dividend yield estimated at 7.4%, we believe there is limited downside from these levels (refer to charts 13-16).
Even on consensus earnings estimates, IOCL trades at a significant discount to its long-term average. With our FY21E EBITDA 21% above consensus, our valuation multiple is below consensus.
Using the Gordon growth model and cost of equity of 11% (refer to chart 11), we find that IOCL is factoring negative terminal growth at current market price. Even ignoring margin accretion, Indian oil demand alone can comfortably grow at 5-6% over the next decade (refer to chart 12).
85 Edelweiss Securities Limited Oil, Gas and Services
Chart 10: Our EBITDA estimate is 21% above consensus for FY21 12.5 +1SD
10.7 +1SD +1SD 8.9
-1SD 7.1 -1SD EV/ EBITDA (x) EBITDA EV/ -1SD 5.3
3.5 BPCL IOCL HPCL
EV/EBITDA Consensus EV/EBITDA (Edel estimates) 10 year avg
Chart 11: At CMP, the stock is pricing negative terminal earnings growth
400 365 -4.5% 339 331 0.3% 320 256 240 167 -2.5%
160 132 (INR/share) 80
0
IOCL (CMP)IOCL
BPCL (CMP)BPCL
HPCL (CMP)HPCL
Zerogrowth Zerogrowth Zerogrowth
2.5% Growth 2.5% Growth 4.5%
0.3% Growth 0.3% - - *closing prices are as of Aug 5, 2019 Chart 12: Our target price is the highest on the Street 600
480
360
240 (INR/share)
120
0 HPCL BPCL IOCL
Low-High Mean Current price Target Price
Source:Companies, Edelweiss research
86 Edelweiss Securities Limited Indian Oil Corporation
Valuation multiples significantly below long-term range
Chart 13: EV/EBITDA(x) versus long-term average Chart 14: PER(x) versus long-term average 35.0 14.0
28.0 11.2 +1SD
21.0 +1SD 8.4 (x) (x) 5.6 14.0 -1SD
2.8 7.0 -1SD 0.0
0.0
2015 2009 2010 2011 2012 2013 2014 2016 2017 2018
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 PER 10 year average EV/EBITDA 10 year average
Source:Companies, Edelweiss research
Chart 15: P/B(x) versus long-term average Chart 16: Dividend Yield versus long-term average 8.0 2.5 +1SD 2.0 6.4
+1SD
1.5 4.8
(x) (x) 1.0 3.2
0.5 -1SD 1.6 -1SD
0.0
0.0
2012 2013 2014 2015 2009 2010 2011 2016 2017 2018
2010 2012 2015 2017 2009 2011 2013 2014 2016 2018 P/B 10 year average DIVIDEND YIELD 10 year average
Source: Bloomberg, Edelweiss research
Valuation multiples significantly below peer average Despite OMCs enjoying superior ROCE and offering significantly higher dividend yields, they trade at a significant discount to peer average (refer to table 11). Earnings growth is also expected to pick up across OMCs led by capacity expansion and margin accretion (refer to tables 12 & 13).
87 Edelweiss Securities Limited Oil, Gas and Services
5.5
2.0
8.6
5.8
7.5
NA
(%)
-6.6
22.9
17.3
15.1
36.4
10.7
18.9
19.8
75.7
20.5
11.1
10.0 16.0
131.0 FY19-21E EPS CAGR EPS
5.3
8.0
4.6
3.2
2.8
2.2
3.4
2.9
3.8
4.3
3.4
3.9
3.6
6.6
3.5
0.6
7.1
8.3
5.5
7.4
(%)
Div Div FY20E yield
8.6
8.4
8.2
9.9
7.2
8.8
3.8
5.5
5.7
4.7
7.1
5.1
13.4
10.9
20.7
16.1
17.6
14.5
16.1
17.0 FY21E P/E (x) P/E
0.4
0.2
0.3
0.6
0.5
0.7
0.6
0.2
0.5
0.4
0.4
0.6
1.4
1.8
1.5
0.8
0.8
0.7
0.9
0.7 FY19
D/E (x) D/E Source: Company,Source:research Edelweiss
8.8
5.1
NA
10.8
18.7
17.5
13.4
13.8
25.3
16.3
18.5
16.7
13.5
13.6
16.3
11.0
21.0
21.9
22.5 18.6
FY21E
ROE (%) ROE
7.6
7.5
4.0
7.7
8.5
8.9 8.4
6.5
11.4
12.2
20.3
10.2
13.2
10.6
13.5
11.8
12.4
12.9
11.4 13.0
FY21E
7.5
7.2
3.6
8.0
8.4
7.9
8.5
9.9
5.4 8.1
3.2
11.6
12.6
21.3
10.1
10.9
11.9
12.8
11.7
11.3 FY20E
ROCE (%) ROCE
7.5
7.2
3.6
9.4
8.4
7.9
8.5
9.9
5.4
3.1 4.4
-6.0
11.6
13.0
21.3
11.0
12.8
14.7
12.7
10.9 FY19
6.4
4.6
4.9
9.7
9.3
6.2
5.5
7.2
5.9
6.8
4.4
5.7
4.8
4.3
5.7
4.4
10.2
10.8
10.7 10.4 FY21E
6.7
4.7
5.0
7.9
7.6
8.6
7.6
8.8
5.6
8.4
5.6
5.2
6.5
5.2
10.4
10.9
11.1
10.1
11.4 12.5 FY20E
EV/EBITDA( x) EV/EBITDA(
5.4
3.4
3.2
9.4
9.7
7.5
5.8
7.6
9.2
8.2
5.9
5.0
7.0
5.8
10.6
11.9
10.3
14.6
20.1 15.5 FY19
0.5
0.3
3.9
3.5
1.9
7.7
10.3
10.4
51.2
10.4
96.9
50.6
48.0
24.8
3,103
FY21E
0.5
0.3
3.7
3.2
1.7
5.8
7.8
4.5
4.8
32.4
80.4
42.6
41.5
19.8
3,139
FY20E
Diluted EPS (LC) EPS Diluted
0.5
0.3
2.8
2.7
1.0
7.3
5.4
1.9
11.9
66.8
43.9
39.7
18.4
FY19
(13.8)
2,774
420
3,238
8,295
5,700
1,437
5,085
9,938
89,920
26,081
35,194
46,512
36,590
15,927
Mcap
163,270
112,598
(USD mn) (USD
Table 11: Valuation Snapshot 11:Valuation Table
APAC Refining-Mean APAC
Sinopec
Petrochina
VietnamNational Petroleum
APAC Refining APAC
Europe Refining-Mean Europe
Dcc Plc Dcc
Rubis
NesteOyj
Europe Refining Europe
US Refining-MeanUS
ValeroCorp Energy
Phillips66
Marathon Petroleum Corp Marathon
US RefiningUS
India Refining-Mean India
ChennaiPetroleum Ltd Corp
Mangalore Refinery Mangalore Petrochemicals & Ltd
RelianceIndustries Limited
India Refining India
India OMC-Mean India
HindustanPetroleum LimitedCorporation
Bharat Petroleum Bharat LimitedCorporation
IndianOil LimitedCorporation India OMC India Company
88 Edelweiss Securities Limited Indian Oil Corporation
Table 12: IOCL—SOTP Base value Base value Base value (USD bn) (INR bn) (INR/share) IOCL refining (@ EV/EBITDA 5.5x) 14.7 991 106 IOCL marketing (@ EV/EBITDA 4x) 4.8 323 34 IOCL pipelines (@ EV/EBITDA 5.5x) 5.6 379 40 IOCL chemicals (@ EV/EBITDA 6x) 6.3 425 45 Enterprise value of operating assets 31.4 2,118 226 Value of CPCL 0.9 62 7 Investments at 30% discount 3.9 260 28 Net debt 7.1 479 51 Equity value 25.2 1701 182 Source: Company, Edelweiss research
89 Edelweiss Securities Limited Oil, Gas and Services
Table 13: IOCL—Capacity details MMTPA Refining Current Expansion Total Year of commissioning Guwahati 1.0 0.0 1.0 Barauni 6.0 3.0 9.0 FY22 Koyali 13.7 3.0 16.7 FY21 Haldia 7.9 0.5 8.4 FY21 Mathura 8.0 1.2 9.2 FY21 Digboi 0.7 0.0 0.7 Panipat 15.0 10.0 25.0 FY23 Bongaigaon 2.4 0.0 2.4 Paradip 15.0 5.0 20.0 FY24 Total 69.6 22.7 92.3 Petchem Panipat PTA 0.6 0.0 0.6 PP 0.6 0.0 0.6 HDPE 0.3 0.0 0.3 LLDPE 0.4 0.0 0.4 MEG 0.3 0.0 0.3 Butadiene 0.1 0.0 0.1 Koyali LAB 0.1 0.0 0.1 Paradip PP 0.0 0.7 0.7 FY20 PTA 0.0 1.2 1.2 FY23 MEG 0.0 0.4 0.4 FY22 Total 2.4 2.3 4.6 Source: Company, Edelweiss research
90 Edelweiss Securities Limited Indian Oil Corporation
Key risks – Stake sale overhang; Paradip stabilsation
Government’s stake sale overhang The government recently announced its intention to sell its stake in public sector enterprises to 41% compared to the earlier floor of 51%. This is a potential overhang on IOCL as the government currently owns 52% in the company.
Delay in Paradip stabilisation Paradip will account for bulk of petchem capacity and more than double petchem earnings by FY25. This will also have a knock-on effect on GRM as value-added products like propylene, hexane, etc., will be supplied internally from the refinery to the petchem plant. Hence, any delay in ramp up of Paradip capacity will lead to a hit on refining and petchem earnings.
Return of regulation of auto fuels Although we expect the regime of deregulation to continue, a spate of state elections in 2019 could herald a return of regulation of auto fuel prices, especially in the face of high oil prices.
Delay in LPG subsidy reimbursement Additionally, LPG subsidies of INR250bn are pending with the central government and are scheduled to be repaid in FY20. Any delay in repayment of these subsidies will add to the interest burden of OMCs.
91 Edelweiss Securities Limited Oil, Gas and Services
Company Description Indian Oil Corporation (IOCL) is the largest oil marketing company in India with a ~47% market share. It also has the largest network of retail outlets across the country (more than 25,000 outlets). It also has the largest refining capacity in the country at 80.7mtpa. It has commissioned its 15mtpa refinery at Paradip which is the most complex PSU refinery. IOCL also has a large presence in pipelines and chemicals.
Investment Theme Among OMCs, IOCL’s refineries are better in terms of complexity and on average have generated higher refining margins. The Paradip refinery, on full capacity utilisation, will consistently generate GRMs at a premium to Singapore benchmarks given its high complexity adding to IOCL’s refining margins.
IOCL enjoys a first mover advantage and strong presence in the high entry barrier rural areas (~26%) which will enable it to ride the robust rural demand growth.
Along with higher diesel cracks due to IMO and a cyclical recovery in gasoline cracks, we expect higher GRM to drive refinery EBITDA by 62% CAGR over FY19-21E. Upcoming refining upgradations will also enable higher refining margins.
Stable earnings from pipelines cushion it from the volatility of the refining and marketing segments.
Key Risks Roll-back of de-regulation due to sharp rally in crude price
Regulatory change in the form of reduction in duty protection will lower refining margins.
92 Edelweiss Securities Limited Indian Oil Corporation
Financial Statements Key Assumptions Income statement (INR mn) Year to March FY18 FY19 FY20E FY21E Year to March FY18 FY19 FY20E FY21E Macro Net revenue 4,214,918 5,281,489 5,185,179 5,370,664 GDP(Y-o-Y %) 6.5 7.1 7.6 7.6 Materials costs 3,368,464 4,420,968 4,202,801 4,280,354 Inflation (Avg) 3.8 4.0 4.5 4.5 Gross profit 846,454 860,522 982,378 1,090,310 Repo rate (exit rate) 6.0 6.5 6.8 6.8 Employee costs 106,807 115,963 125,075 134,909 USD/INR (Avg) 64.5 70.0 72.0 72.0 Other Expenses 323,715 392,332 464,111 489,138 Sector EBITDA 415,932 352,227 393,192 466,263 Brent Crude (USD/bbl) 57.6 69.0 65.0 65.0 Depreciation 76,635 85,065 93,348 100,960 Under-recovery (INR bn) 282 612 611 835 EBIT 339,297 267,162 299,844 365,303 % sharing by Govt 100.0 92.7 90.5 86.0 Less: Interest Expense 38,105 48,880 57,455 55,829 % sharing by upstream - 7.3 9.5 14.0 Add: Other income 34,198.8 27,142.8 34,686.19 38,214.68 Company Profit Before Tax 335,391 245,425 277,075 347,688 Refining Less: Provision for Tax 118,239 86,531 100,606 124,674 Refining thrput (mmt) 69 70 70 71 Less: Minority Interest 4,369 (1,029) 3,428 3,982 GRM (USD/bbl) 8.5 5.7 8.5 7.9 Associate profit share 9,112 13,844 14,280 14,750 Opex (USD/bbl) 2.1 2.8 2.8 3.0 Reported Profit 221,895 173,767 187,321 233,782 Chemicals Exceptional Items - (1) - - Chem prodn (mmt) 6.4 6.4 6.9 6.9 Adjusted Profit 221,895 173,768 187,321 233,782 Chem EBITDA (USD/mt) 9.5 12.2 12.9 13.4 Shares o /s (mn) 9,443 9,443 9,443 9,443 Marketing Adjusted Basic EPS 23.5 18.4 19.8 24.8 Export sales (mmt) 7.2 9.2 11.7 14.9 Diluted shares o/s (mn) 9,443 9,443 9,443 9,443 Tot dom. sales (mmt) 77.1 78.8 82.3 87.9 Adjusted Diluted EPS 23.5 18.4 19.8 24.8 Gasoline sales (mmt) 10.9 11.8 12.7 13.7 Adjusted Cash EPS 36.0 30.9 33.3 39.0 Diesel sales (mmt) 36.5 37.7 39.5 42.7 Dividend per share (DPS) 10.5 9.3 9.4 11.8 Nor. gross mgn (INR/mt) 4,097 3,605 3,383 3,485 Dividend Payout Ratio(%) 52.1 58.6 55.2 55.6 Pipelines
Ppl thrput (BTKM) 49.8 52.7 52.7 52.7 Common size metrics Ppl EBITDA INR/mmt/km 1.2 1.3 1.3 1.3 Year to March FY18 FY19 FY20E FY21E Financial assumptions Materials costs 79.9 83.7 81.1 79.7 Avg. Interest rate (%) 4.5 10.0 10.0 7.0 Staff costs 2.5 2.2 2.4 2.5 Gross debt (INR bn) 586 670 740 691 S G & A expenses 7.7 7.4 9.0 9.1 Capex (INR bn) 165 225 220 222 Operating expenses 90.1 93.3 92.4 91.3 Cash conversion cycle 42 40 48 44 Depreciation 1.8 1.6 1.8 1.9 Interest Expense 0.9 0.9 1.1 1.0 EBITDA margins 9.9 6.7 7.6 8.7 Net Profit margins 5.4 3.3 3.7 4.4
Growth ratios (%) Year to March FY18 FY19 FY20E FY21E Revenues 18.6 25.3 (1.8) 3.6 EBITDA 22.4 (15.3) 11.6 18.6 PBT 22.8 (26.8) 12.9 25.5 Adjusted Profit 8.8 (21.7) 7.8 24.8 EPS 8.8 (21.7) 7.8 24.8
93 Edelweiss Securities Limited Oil, Gas and Services
Balance sheet (INR mn) Cash flow metrics As on 31st March FY18 FY19 FY20E FY21E Year to March FY18 FY19 FY20E FY21E Share capital 94,787 91,810 91,810 91,810 Operating cash flow 290,817 190,545 444,030 398,078 Reserves & Surplus 1,043,951 1,032,882 1,113,099 1,212,348 Financing cash flow (119,736) 113,205 (168,002) (194,911) Shareholders' funds 1,138,738 1,124,692 1,204,909 1,304,158 Investing cash flow (171,187) (209,345) (237,700) (120,752) Minority Interest 21,512 18,774 22,202 26,184 Net cash Flow (106) 94,405 38,328 82,415 Long term borrowings 230,605 391,525 391,025 390,525 Capex (224,448) (259,116) (272,386) (158,967) Short term borrowings 425,893 535,593 532,650 528,602 Dividend paid (114,672) (105,558) (107,104) (134,533) Total Borrowings 656,498 927,117 923,675 919,126
Long Term Liabilities 43,548 - - - Profitability and efficiency ratios Def. Tax Liability (net) 123,679 165,097 212,974 261,428 Year to March FY18 FY19 FY20E FY21E Sources of funds 1,983,975 2,235,681 2,363,760 2,510,896 ROAE (%) 20.6 15.0 16.1 18.6 Gross Block 1,426,726 1,578,398 1,743,284 1,854,751 ROACE (%) 15.1 10.9 11.3 13.0 Net Block 1,229,874 1,296,482 1,368,019 1,378,527 Inventory Days 74 61 65 63 Capital work in progress 191,304 282,807 390,307 437,807 Debtors Days 8 9 11 11 Intangible Assets 10,656 28,456 28,456 28,456 Payable Days 37 32 36 35 Total Fixed Assets 1,431,834 1,607,745 1,786,783 1,844,790 Cash Conversion Cycle 46 38 41 39 Non current investments 366,073 355,108 369,388 384,138 Current Ratio 1.2 1.2 1.2 1.3 Cash and Equivalents 86,931 94,816 133,143 215,558 Gross Debt/EBITDA 1.6 2.6 2.3 2.0 Inventories 705,679 771,265 736,718 748,887 Gross Debt/Equity 0.6 0.8 0.8 0.7 Sundry Debtors 106,965 157,977 155,244 160,766 Adjusted Debt/Equity 0.6 0.8 0.8 0.7 Loans & Advances 28,308 38,832 42,176 37,691 Net Debt/Equity 0.5 0.7 0.6 0.5 Other Current Assets 232,551 325,809 230,644 237,031 Interest Coverage Ratio 8.9 5.5 5.2 6.5 Current Assets (ex cash) 1,073,503 1,293,883 1,164,781 1,184,376
Trade payable 367,667 411,941 406,390 415,255 Operating ratios Other Current Liab 605,081 703,929 683,945 702,711 Year to March FY18 FY19 FY20E FY21E Total Current Liab 972,748 1,115,871 1,090,335 1,117,966 Total Asset Turnover 2.3 2.5 2.3 2.2 Net Curr Assets-ex cash 100,755 178,012 74,446 66,410 Fixed Asset Turnover 3.5 4.1 3.8 3.8 Uses of funds 1,983,975 2,235,681 2,363,760 2,510,896 Equity Turnover 3.8 4.6 4.4 4.2 BVPS (INR) 120.6 119.1 127.6 138.1
Valuation parameters
Free cash flow (INR mn) Year to March FY18 FY19 FY20E FY21E Year to March FY18 FY19 FY20E FY21E Adj. Diluted EPS (INR) 23.5 18.4 19.8 24.8 Reported Profit 221,895 173,767 187,321 233,782 Y-o-Y growth (%) 8.8 (21.7) 7.8 24.8 Add: Depreciation 76,635 85,065 93,348 100,960 Adjusted Cash EPS (INR) 36.0 30.9 33.3 39.0 Deferred tax 24,672 31,646 36,593 35,810 Diluted P/E (x) 5.4 6.8 6.4 5.1 Others (2,227) (222,355) 230,333 35,533 P/B (x) 1.0 1.1 1.0 0.9 Less: Changes in WC 30,158 (122,423) 103,566 8,007 EV / Sales (x) 0.4 0.4 0.4 0.4 Operating cash flow 290,817 190,545 444,030 398,078 EV / EBITDA (x) 4.3 5.8 5.2 4.4 Less: Capex 224,448 259,116 272,386 158,967 Dividend Yield (%) 8.3 7.3 7.4 9.4 Free Cash Flow 66,368 (68,571) 171,644 239,111 EV 1,780,898 2,040,893 2,040,893 2,040,893
Peer comparison valuation Market cap Diluted P/E (X) EV / EBITDA (X) ROAE (%) Name (USD mn) FY20E FY21E FY20E FY21E FY20E FY21E Indian Oil Corporation 16,352 6.4 5.1 5.2 4.4 16.1 18.6 Bharat Petroleum Corporation 10,383 8.2 7.1 6.6 5.8 20.9 22.2 Hindustan Petroleum Corporation 5,149 5.6 4.7 5.2 4.3 20.3 21.9 Reliance Industries 113,118 15.9 13.2 10.2 7.6 11.0 11.0 Median - 7.3 6.1 6.6 6.3 18.2 20.3 AVERAGE - 9.0 7.5 7.1 6.1 17.1 18.5 Source: Edelweiss research
94 Edelweiss Securities Limited Indian Oil Corporation
Additional Data Directors Data Sanjiv Singh Chairman G K Satish Whole Time Director (Planning & Business Development) Anish Aggarwal Whole Time Director (Pipelines) Verghese Cherian Whole Time Director (Human Resources) A K Sharma Whole Time Director (Finance) A.P.Sawhney Government Nominee Director Archana Mathur Government Nominee Director B.S.Canth Whole Time Director (Marketing) Ashutosh Jindal Government Director Subroto Bagchi Independent Director Sanjay Kapoor Independent Director Parindu Bhagat Independent Director
Auditors - M/s Parakh & Co, Dass Gupta & Associates, J Gupta & Associates *as per last annual report
Holding – Top10 Perc. Holding Perc. Holding Government of india 51.5 Oil & natural gas co 14.2 Life insurance corp 6.51 Oil india ltd 5.16 Reliance capital tru 3.29 Ioc shares trust 2.48 Icici prudential ass 2.14 Vanguard group 0.83 Blackrock 0.72 Franklin resources 0.69
*in last one year
Bulk Deals Data Acquired / Seller B/S Qty Traded Price
No Data Available
*in last one year
Insider Trades Reporting Data Acquired / Seller B/S Qty Traded 01 Apr 2019 The President Of India Sell 122964424.00 11 Mar 2019 President Of India Sell 37203876.00
*in last one year
95 Edelweiss Securities Limited COMPANY UPDATE
BHARAT PETROLEUM COR PORATION
Strong structural uplift
India Equity Research| Oil, Gas and Services COMPANYNAME
Bharat Petroleum Corporation (BPCL) ranks last in our pecking order EDELWEISS 4D RATINGS amongst OMCs. Key highlights: 1) high distillate yield and stabilisation of Absolute Rating BUY Kochi refinery expansion will lead to GRM jumping 69% over FY19-21E; 2) Rating Relative to Sector Outperform GRM will rise to USD7.8/bbl by FY21E due to IMO and normalising gasoline Risk Rating Relative to Sector Medium cracks; 3) Kochi GRM will rise from USD4.3/bbl in FY19 to USD8.2/bbl by Sector Relative to Market Equalweight FY21E due to higher gasoline/propylene slate and lower fuel losses; 5) BPCL will clock the lowest volume growth among OMCs due to lack of capacity expansion at standalone refineries; and 6) valuations are the most MARKET DATA (R: BPCL.BO, B: BPCL IN) expensive among OMCs (5.7x FY21E EV/EBITDA) despite modest earnings CMP : INR 342 growth, lowest dividend yield and lowest ROCE. Maintain ‘BUY’ with Target Price : INR 442 revised SOTP-based TP of INR442 (INR373 earlier) due to higher GRM. 52-week range (INR) : 422 / 239 Share in issue (mn) : 2,169.2
M cap (INR bn/USD mn) : 742 / 10,383 Higher GRM to drive earnings growth Avg. Daily Vol.BSE/NSE(‘000) : 6,025.8 Kochi refinery has been a significant underperformer; despite higher complexity of 10.8,
GRM is below Mumbai refinery (complexity<8) and materially below management’s SHARE HOLDING PATTERN (%) guidance. Post stabilisation in FY20E, we expect gasoline share to rise (FY18: 16.9%, Current Q4FY19 Q3FY19 below Mumbai: 17.5%) and fuel losses to narrow (FY18: 7.9%, Mumbai: 4.6%). Promoters * 53.3 53.9 53.9 Conversion of LPG to higher margin propylene will also start once petchem capacity MF's, FI's & BK’s 16.4 16.8 16.8 ramps-up. With higher diesel cracks due to IMO and normalisation of gasoline cracks, we FII's 15.3 14.6 14.6 estimate 69% surge in GRM by FY21E. Others 15.0 14.7 14.7 * Promoters pledged shares : NIL Diversification in to petchem, upstream and city gas distribution (% of share in issue)
We expect capex to almost double over FY19-23E (INR810bn versus INR460bn in FY14- 18) due to investments in Mozambique LNG, 50% expansion in retail outlets and various PRICE PERFORMANCE (%) EW O & G CGD projects. BPCL will be at par with IOCL in petchem capacity by FY25E with projects Stock Nifty Index planned at Mumbai and Bina along with the Kochi polyols project. However, given the sub-par IRR in upstream projects, we would have preferred BPCL to focus on core 1 month (10.7) (8.1) (12.9) refining/petchem projects rather than over-diversifying in to upstream projects. 3 months (12.7) (5.6) (16.4) 12 months (16.1) (4.7) (16.3)
Outlook and valuation: Inexpensive valuations; maintain ‘BUY’ As GRM expands and marketing margin stabilises, we expect a secular re-rating of the OMC universe; with multiples at a 35% discount to long-term average and dividend yield at 5.5%, valuations have seldom been more attractive. We maintain ‘BUY/SO’ with revised TP of INR442 (5.7x FY21E EV/EBITDA). Key risks: Delays in Kochi ramp up, Mozambique gas production and regulation of marketing margins. Financials (INR mn) FY18 FY19 FY20E FY21E Year to March Jal Irani Net revenue 2,357,698 2,982,256 2,894,466 3,038,255 +91 22 6620 3087 EBITDA 151,727 151,122 160,596 181,898 [email protected]
Adjusted Profit 90,086 78,023 81,972 94,912 Vijayant Gupta Adjusted diluted EPS (INR) 45.8 39.7 41.7 48.3 +91 22 4040 7402 Diluted P/E (x) 7.5 8.6 8.2 7.1 [email protected]
EV/EBITDA (x) 6.6 7.0 6.6 5.8 ROAE (%) 27.5 21.5 20.9 22.2 August 22, 2019
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Bharat Petroleum Corporation
Bina refinery will drive future growth post Kochi IREP Post the recent capacity expansion at Kochi (9.5MTPA to 15.5MTPA), standalone refinery capacity has peaked in the near term (refer to chart 1). Capacity growth in the future will be driven by the JV refinery with Mittal Energy at Bina (BPCL has 50% stake); BPCL plans to expand it to 15MTPA by FY23E from just 6MTPA currently (refer to chart 2). With GRM of USD 9.8/bbl in FY19, Bina is the most profitable refinery in BPCL’s portfolio. We expect Bina to contribute INR12.6bn to the group’s earnings by FY23E (10% of overall PAT versus 5% in FY18).
Chart 1: JV refinery (Bina) will drive throughput growth Chart 2: We expect slight increase in BPCL’s market share 45 9.0 27.0 50
36 8.0 40 26.5
30
27 7.0 26.0 (%)
20 $/bbl 18 6.0 25.5
Marketing Sales (MMT) Sales Marketing 10 Capacity (MMT) Capacity 9 5.0
0 25.0
FY18 FY17
FY22E FY20E FY21E FY23E
0 4.0 FY19E
FY18 FY19
FY17 MS HSD LPG
FY20E FY21E FY22E FY23E Mumbai Kochi Bina GRM (RHS) SKO Others Market Share Source: Company, Edelweiss research
Strong growth in GRM among OMCs Unlike HPCL and IOCL, GRM recovery will be the sole driver of refining earnings growth at BPCL. We estimate GRM to jump 69% during FY19-21E led by surge in diesel cracks due to IMO along with normalisation of gasoline cracks (refer to table 1).
We also expect GRM to expand at the Kochi refinery post completion of Integrated Refinery Expansion Project (IREP). Despite being a more complex refinery (NCI: 10.8) than Mumbai (<8.0), GRM at Kochi continues to lag Mumbai. As the refinery stabilises post maintenance/upgradation shutdowns undergone in FY19, we expect overall GRM to expand to USD 7.8/bbl by FY21E.
Table 1: GRM to jump 69% by FY21E led by surge in gasoline and diesel cracks Product Slate % Product (New, from CY 2021) Slate % US$/bbl CY 2017 CY 2018 CY 2019E CY 2020E CY 2021E CY 2022E CY 2023E 20.0 17.2 Gasoline 12.0 6.3 10.0 14.0 12.0 11.0 10.0 50.3 48.2 Diesel 13.2 14.4 16.0 21.0 19.0 18.0 17.0 0.0 3.9 HSFO (5.4) (4.2) (12.0) (27.0) (25.0) (22.0) (21.0) 6.8 6.8 Jet/Kero 13.3 14.9 15.0 16.0 15.0 14.0 14.0 5.0 5.0 LPG (25.2) (23.8) (22.0) (19.0) (20.0) (20.0) (21.0) 5.2 5.2 Naphtha 0.2 (3.9) 0.1 0.2 0.1 0.0 0.0 BPCL 6.9 4.6 7.2 7.8 7.3 7.5 7.7 Source: FGE, Edelweiss research Note: CY2020 refers to year ending Mar’21 for OMC’s
97 Edelweiss Securities Limited Oil, Gas and Services
Due to maintenance at the FCC unit in Kochi, gasoline output at the refinery has been lower than Mumbai. Along with higher fuel losses, this has been the key reason behind the lower distillate yield at Kochi (64%) compared to Mumbai (68%). We expect higher gasoline output and lower fuel losses at Kochi in the future, which should drive higher distillate yields as well as higher GRM at Kochi (refer to chart 3 & figure 1). With the Kochi petchem plant expected to start from FY21E, negative margin LPG output (FY19 product crack: -USD20/bbl) will be replaced with propylene, which earns as much as USD50-60/bbl.
Chart 3: We expect BPCL’s Kochi refinery GRM to double and match that of Bina following stabilisation
HMEL, Bhatinda The sweet spot: High distillate, High GRM 12.2 NRL, Numaligarh RIL, Jamnagar BORL, Bina
10.4 IOC, Koyali
HPCL, Mumbai EOL, Vadinar
GRM, $/bblGRM, 8.6 IOC, Digbol MRPL, Mangalore IOC, Panipat IOC, Mathura IOC, Haldia IOC, Guwahati BPCL, Mumbai 6.8 IOC, Paradip IOC, Barauni HPCL, Vishak IOC, Bongaigaon CPCL BPCL, Kochi
5.0 40.0 45.0 50.0 55.0 60.0 65.0 70.0 75.0 80.0 85.0 90.0
Distillate yield (%) Distillate yield= gasoline+diesel+jet fuel+kerosene-fuel losses Source: MoPNG, Edelweiss research
98 Edelweiss Securities Limited Bharat Petroleum Corporation
Fig 1: Bina (BPCL: 50% stake) and NRL (62% stake) are two of the most profitable refineries in India
Source: Company, Edelweiss research Refining to drive growth Traditionally, due to the gap between refining throughput and marketing volumes, marketing has accounted for bulk of BPCL’s earnings. However, post commissioning of the Kochi IREP, the gap has narrowed significantly; refining contributed to majority (61%) of FY18 earnings. We estimate refining share to recover to 54% in FY21E (FY19: 30%) led by recovery in GRM (refer to charts 4 & 5).
99 Edelweiss Securities Limited Oil, Gas and Services
Chart 4: Refining EBITDA to clock 53% CAGR during FY19-21E Chart 5: Refining EBITDA share to rise to 54% by FY21E
100 10% 100%
8% 80 80% 6% 60% 60 4% 40%
40 EBITDA margin (%) margin EBITDA
2% (%) Share EBITDA
Refining EBITDA (INR Bn) (INR EBITDA Refining 20% 20 0%
0%
FY18 FY14 FY15 FY16 FY17 FY19 FY21E FY20E FY14 FY15 FY16 FY17 FY18 FY19 FY20EFY21E
EBITDA (INR Mn) EBITDA Margin Refining Marketing Pipelines
Source: Company, Edelweiss research
Based on our sensitivity analysis, while a 10% change in GRM will impact overall EBITDA 8%, 10% change in marketing margin will lead to 15% change in EBITDA (refer to table 2). This is primarily due to higher marketing volumes compared to refining throughput (refer to chart 6). Chart 6: GRM to jump 69% over FY19 Table 2: A 10% change in GRM leads to 8% change in EBITDA 12.0 % Change in EBITDA GRM Change -20% -10% 0% 10% 20% -20% -47 -39 -31 -22 -14 9.6 Marketing -10% -32 -24 -15 -7 1 margin 0.0% -16 -8 0 8 16 change 10% -1 7 15 24 32 7.2 20% 14 22 31 39 47
4.8 GRM ( $/bbl) ( GRM
2.4
0.0
FY12 FY15 FY11 FY13 FY14 FY16 FY17 FY18 FY19
FY20E FY21E IOCL BPCL HPCL
Source:Company,Edelweiss research Source: Company, Edelweiss research
Kochi refinery ramp up to boost profitability In FY19 BPCL reported USD4.6/bbl GRM, slightly below Singapore GRM of USD4.9/bbl. However, Kochi refinery continues to underperform—below Mumbai GRM at USD4.3/bbl and significantly below management’s guidance of USD8-9/bbl. The under-performance is due to continued hurdles to ramp up of secondary units at the refinery; resolution of these will offer material upside to overall earnings (refer to table 3). Based on our management interaction, we believe GRM at Kochi can expand to USD8.2/bbl post stabilisation.
Significant upcoming complexity enhancement at Kochi: With a capex of INR160bn, the Kochi expansion project is expected to boost complexity from 7 (FY18) to 11 post stabilisation. This will make the Kochi refinery as complex as RIL’s Jamnagar domestic
100 Edelweiss Securities Limited Bharat Petroleum Corporation
refinery. Its higher complexity will enable the full Kochi refinery to earn GRM of USD8- 9/bbl (currently USD5-6/bbl). However, ramp up has not proceeded as planned and progress on this project remains a key monitorable. The project has been aided by strong support from the state government, which has declared the project site as a strike-free zone.
Table 3: Potential gains of Kochi expansion/complexity upgradation Impact of full utilization at Kochi Refinery INR mn GRM ($ 4.3/bbl to $8.2/bbl) 31,017 Less:Incremental Opex 3,500 Incremental EBITDA 27,517 FY21E Refining EBITDA 84,300 % FY21 EBITDA 32.6 Source: Edelweiss research
Upgradation towards fuel efficiency: The CFO recently reiterated that upgradation towards BSV is underway at all locations. Cumulative capex for Mumbai and Kochi upgradation will be ~INR50-60bn.
Upgradation will help eliminate existing bottlenecks in refineries, thereby improving overall efficiency.
Further refinery expansions: Bina’s creeping expansion from 6.0-7.8MMT has been completed. Further expansion from 7.8MMT to 15.0MMT and Numaligarh’s expansion from 3MMT to 9MMT are being evaluated and should add to volumes from FY22. BPCL expects to see further progress in the establishment of the West coast refinery.
Focus shifts to petchem BPCL’s Kochi 500KTPA propylene derivative project (INR48bn) is on track for commissioning in Q1FY21E. On completion, the complex will produce three major products—acrylic acid, oxo-alcohol and acrylates—products that are currently 100% imported.
Product slate: Of the 500KTPA, 50% output will be towards production of specialised niche chemicals. The balance will go in to production of specialised polymer grades.
Focus on in-house R&D: BPCL is working with Air Liquide Global E&C Solutions, which is providing the technology licence, basic engineering, technical services as well as proprietary catalyst and equipment for the world-scale unit. Efforts are also underway to shore up internal R&D to prune dependence on foreign service providers.
Mega petchem project at Rasayani, Mumbai
BPCL is planning to set up a 2MT petchem plant at Rasayani, Mumbai (1.5MT PE, 0.5MT PP), at a cost of USD6bn, expected to start by 2023. This will place the company at par with IOCL in terms of petchem capacity (refer to table 4). This will be a naphtha-based cracker with feedstock being sourced from the Mumbai refinery. The site is located about 60km from the Mumbai refinery. BPCL is also planning to start a petchem unit near the Bina refinery.
101 Edelweiss Securities Limited Oil, Gas and Services
Significant surge in capex on upstream and CGD expansion During FY14-18, BPCL incurred capex of INR460bn, spread between refining and marketing. The Kochi IREP and polyol unit accounted for bulk of the capex (INR200bn plus). Over FY19- 23E, we expect capex to ramp up significantly to INR810bn as investments in upstream and city gas distribution (CGD) will start capturing larger share of capex (refer to chart 7); while Mozambique will require USD800mn investment post FID in H2CY19 and cumulative investment of over USD2.5bn, Bharat Gas Resources (BPCL’s CGD arm) has won over 13 GAs during the 9th and 10th rounds of bidding (refer to figure 2). Marketing will continue to account for a significant share of capex as BPCL plans to double its retail network over the next five years.
Chart 7: Capex will surge to INR810bn over FY19-23E 250 2.0
180 1.6
110 1.2
40 0.8 (%) (INR bn) (INR
(30) 0.4
(100) 0.0
FY17 FY18 FY19
FY20E FY21E FY23E FY22E Capex Free cash flow Net Debt/Equity
Source: Company, Edelweiss research
102 Edelweiss Securities Limited Bharat Petroleum Corporation
Fig. 2: Upstream (BPRL) and CGD (BGRL) will start taking up significant share of incremental capex
Source: Company, Edelweiss research
103 Edelweiss Securities Limited Oil, Gas and Services
Table 4: Refining throughput to remain flat in the absence of capacity expansion FY19-23 FY16 FY17 FY18 FY19 FY20E FY21E FY22E FY23E CAGR (%) Refining Througput (MMT) IOCL 58.0 65.2 69.0 71.8 70.4 74.9 77.9 82.9 3.6 BPCL 24.1 25.4 28.5 31.0 30.3 31.1 31.1 31.1 0.0 HPCL 17.2 17.8 18.2 18.5 17.8 20.2 28.2 28.2 11.1 Throughput Growth (yoy,%) IOCL 8.3 12.4 5.8 4.1 (2.0) 6.4 4.0 6.4 BPCL 3.3 5.3 12.4 8.7 (2.4) 2.6 0.0 0.0 HPCL 6.5 3.3 2.2 1.6 (3.7) 13.6 39.1 0.0 GRM ($/bbl) IOCL 5.1 7.8 8.5 5.4 8.3 8.9 8.7 8.8 12.9 BPCL 6.6 5.3 6.9 4.6 7.2 7.8 7.3 7.5 13.1 HPCL 6.7 6.2 7.4 5.0 7.2 7.8 7.5 7.7 11.3 Marketing sales volume (MMT) IOCL 76.1 78.8 84.3 85.1 86.5 89.5 93.0 96.3 3.1 BPCL 38.4 40.2 43.2 45.0 46.1 48.0 50.2 52.2 3.8 HPCL 34.2 35.2 36.9 38.7 40.0 41.9 43.9 45.8 4.3 Volume Growth (%) IOCL (0.5) 3.6 7.0 0.9 1.6 3.5 3.9 3.5 BPCL 4.8 4.6 7.5 4.1 2.4 4.3 4.5 4.0 HPCL 7.1 3.0 4.8 4.8 3.3 4.7 4.9 4.3 Core Marketing margin (INR/ltr) IOCL 3.8 3.5 3.9 4.6 4.2 4.4 4.6 4.9 1.5 BPCL 4.5 3.6 3.7 4.6 4.2 4.4 4.6 4.8 1.2 HPCL 3.4 3.9 3.6 4.4 4.0 4.2 4.4 4.6 1.3 Source:Companies, Edelweiss research
Investment plan for Mozambique gas field ONGC Videsh, Oil India and BPCL along with operator US-based Anadarko Petroleum and other partners announced the final investment decision (FID) of USD20bn for Rovuma Offshore Area-1 Mozambique LNG project. Bharat PetroResources, a unit of BPCL, holds 10% interest in the project that is operated by Anadarko. BPCL has earmarked cumulative investment of USD2.2-2.4bn, of which USD800mn is equity and balance will be raised as debt.
In the gas field in Mozambique, 75tn cubic feet of natural gas has been discovered. The investment will go towards construction of gas liquefaction and export terminal and the project will initially consist of two LNG trains with a total nameplate capacity of 12.88 MMTPA. The project is expected to be commissioned by 2024. The project has successfully secured in aggregate 11.1mtpa of long-term LNG sales (86% of the plant's nameplate capacity). BPCL will import about 1MMTPA of LNG to India from the Rovuma field.
104 Edelweiss Securities Limited Bharat Petroleum Corporation
Valuations at multi-year low; re-rating imminent The potential for regulatory interference leading to an adverse hit on profitability of OMCs has taken a serious toll on valuations of OMC. The sharp underperformance of OMC stocks is driven more by a multiple de-rating than earnings decline. As a result, valuations across OMCs are at multi-year lows; with an FY21E EV/EBITDA at 5.7x and FY21E PER at 7.1x, BPCL is trading at >30% discount to the long-term average. With FY20E dividend yield estimated at 5.5%, we believe there is limited downside from these levels (refer to chart 11-14).
Even on consensus earnings estimates, BPCL trades at a significant discount to the long-term average (refer to chart 8). With our EBITDA estimate for FY21E 12% above consensus, our valuation multiple is below consensus.
Using a Gordon growth model and a cost of equity of 12% (refer to charts 9 & 10), we find that BPCL is factoring conservative terminal growth of 0.3% at current market price. Even ignoring margin accretion, India’s oil demand alone can comfortably grow at 5-6% over the next decade.
Chart 8: Our FY21 EBITDA estimate is 12% above consensus 12.5 +1SD
10.7 +1SD +1SD 8.9
-1SD 7.1 -1SD EV/ EBITDA (x) EBITDA EV/ -1SD 5.3
3.5 BPCL IOCL HPCL
EV/EBITDA Consensus EV/EBITDA (Edel estimates) 10 year avg
Source: Companies, Edelweiss research *closing prices are as of Aug 5, 2019
105 Edelweiss Securities Limited Oil, Gas and Services
Chart 9: At CMP, the stock is pricing a conservative 0.3% terminal earnings growth
400 365 -4.5% 339 331 0.3% 320 256 240 167 -2.5%
160 132 (INR/share) 80
0
IOCL (CMP)IOCL
BPCL (CMP)BPCL
HPCL (CMP)HPCL
Zerogrowth Zerogrowth Zerogrowth
2.5% Growth 2.5% Growth 4.5%
0.3% Growth 0.3% - - Source: Companies, Edelweiss research *closing prices are as of Aug 5, 2019
Chart 10: Our target price lies at the top end of the consensus range 600
480
360
240 (INR/share)
120
0 HPCL BPCL IOCL
Low-High Mean Current price Target Price
Source:Companies, Edelweiss research
106 Edelweiss Securities Limited Bharat Petroleum Corporation
Valuation multiples significantly below long-term range
Chart 11: EV/EBITDA(x) versus long-term average Chart 12: PER(x) versus long-term average 16.0 30.0
13.2 24.0 +1SD +1SD
10.4 18.0
(x) (x) 7.6 12.0 -1SD 4.8 6.0 -1SD
2.0 0.0
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
2016 2009 2010 2011 2012 2013 2014 2015 2017 2018 EV/EBITDA 10 year average PER 10 year average
Chart 13: PBR(x) versus long-term average Chart 14: Dividend yield(x) versus long-term average 4.0 9.0
3.2 7.2 +1SD 2.4 5.4
+1SD (x)
(x) 1.6 3.6
1.8 0.8 -1SD -1SD 0.0
0.0
2010 2013 2016 2009 2011 2012 2014 2015 2017 2018
2015 2017 2009 2010 2011 2012 2013 2014 2016 2018 P/B 10 year average DIVIDEND YIELD 10 year average
Source: Bloomberg, Edelweiss research Source: Companies, Edelweiss research
Valuation multiples significantly below peer average Despite OMCs enjoying superior ROCE and offering significantly higher dividend yields, they trade at significant discount to peer average (refer to tables 5 & 6). Earnings growth is also expected to pick up across OMCs riding capacity expansion and margin accretion (refer to table 7).
.
107 Edelweiss Securities Limited Oil, Gas and Services
5.5
2.0
8.6
5.8
7.5
NA
(%)
-6.6
22.9
17.3
15.1
36.4
10.7
18.9
19.8
75.7
20.5
11.1
10.0
16.0 131.0
FY19-21E EPS CAGR EPS
5.3
8.0
4.6
3.2
2.8
2.2
3.4
2.9
3.8
4.3
3.4
3.9
3.6
6.6
3.5
0.6
7.1
8.3
5.5
7.4
(%)
Div Div
FY20E
yield
8.6
8.4
8.2
9.9
7.2
8.8
3.8
5.5
5.7
4.7
7.1
5.1
13.4
10.9
20.7
16.1
17.6
14.5
16.1
17.0
FY21E
P/E (x) P/E
0.4
0.2
0.3
0.6
0.5
0.7
0.6
0.2
0.5
0.4
0.4
0.6
1.4
1.8
1.5
0.8
0.8
0.7
0.9
0.7
FY19
D/E (x) D/E
Source: Company,Source:research Edelweiss
8.8
5.1
NA
10.8
18.7
17.5
13.4
13.8
25.3
16.3
18.5
16.7
13.5
13.6
16.3
11.0
21.0
21.9
22.5
18.6
FY21E
ROE (%) ROE
7.6
7.5
4.0
7.7
8.5
8.9
8.4
6.5
11.4
12.2
20.3
10.2
13.2
10.6
13.5
11.8
12.4
12.9
11.4
13.0
FY21E
7.5
7.2
3.6
8.0
8.4
7.9
8.5
9.9
5.4
8.1
3.2
11.6
12.6
21.3
10.1
10.9
11.9
12.8
11.7
11.3
FY20E
ROCE (%) ROCE
7.5
7.2
3.6
9.4
8.4
7.9
8.5
9.9
5.4
3.1
4.4
-6.0
11.6
13.0
21.3
11.0
12.8
14.7
12.7
10.9
FY19
6.4
4.6
4.9
9.7
9.3
6.2
5.5
7.2
5.9
6.8
4.4
5.7
4.8
4.3
5.7
4.4
10.2
10.8
10.7
10.4
FY21E
6.7
4.7
5.0
7.9
7.6
8.6
7.6
8.8
5.6
8.4
5.6
5.2
6.5
5.2
10.4
10.9
11.1
10.1
11.4
12.5
FY20E
EV/EBITDA( x) EV/EBITDA(
5.4
3.4
3.2
9.4
9.7
7.5
5.8
7.6
9.2
8.2
5.9
5.0
7.0
5.8
10.6
11.9
10.3
14.6
20.1
15.5
FY19
0.5
0.3
3.9
3.5
1.9
7.7
10.3
10.4
51.2
10.4
96.9
50.6
48.0
24.8
3,103
FY21E
0.5
0.3
3.7
3.2
1.7
5.8
7.8
4.5
4.8
32.4
80.4
42.6
41.5
19.8
3,139
FY20E
Diluted EPS (LC) EPS Diluted
0.5
0.3
2.8
2.7
1.0
7.3
5.4
1.9
11.9
66.8
43.9
39.7
18.4
FY19
(13.8)
2,774
420
3,238
8,295
5,700
1,437
5,085
9,938
89,920
26,081
35,194
46,512
36,590
15,927
Mcap
163,270
112,598
(USD mn) (USD
Table 5: Valuation Snapshot Valuation 5: Table
APAC Refining-Mean APAC
Sinopec
Petrochina
VietnamNational Petroleum
APAC Refining APAC
Europe Refining-Mean Europe
Dcc Plc Dcc
Rubis
NesteOyj
Europe Refining Europe
US Refining-MeanUS
ValeroCorp Energy
Phillips66
Marathon Petroleum Corp Marathon
US RefiningUS
India Refining-Mean India
ChennaiPetroleum Ltd Corp
Mangalore Refinery Mangalore Petrochemicals & Ltd
RelianceIndustries Limited
India Refining India
India OMC-Mean India
HindustanPetroleum LimitedCorporation
Bharat Petroleum Bharat LimitedCorporation
IndianOil LimitedCorporation
India OMC India Company
108 Edelweiss Securities Limited Bharat Petroleum Corporation
Table 6: BPCL SOTP Base value Base value Base value Particulars (USD bn) (INR bn) (INR/share BPCL standalone refining (@ EV/EBITDA 5.5x) 6.5 434 221) Equity value of Bina refinery (@ EV/EBITDA 6.5x) 0.3 21 11 BPCL marketing (@ EV/EBITDA 4x) 3.3 220 112 BPCL pipelines (@ EV/EBITDA 5.5x) 0.5 34 17 NRL (@ EV/EBITDA 6.5x) 2.0 131 67 Mozambique (@ DCF, 10% stake) 2.5 168 85 EV of operating assets 15.2 1,019 518 Non-current investments at 30% discount 2.9 193 98 Net debt 2.2 150 76 Equity value 13.0 869 442 Source: Company, Edelweiss research
Table 7: BPCL capacity MMTPA Refining Current Expansion Total Year of commissioning Mumbai 12.0 0.0 12.0 Kochi 15.5 0.0 15.5 Bina 6.0 9.0 15.0 FY23 Total 33.5 9.0 42.5 Petchem Kochi Acrylates 0.0 0.5 0.5 FY21 Mumbai PE 0.0 1.5 1.5 FY24 PP 0.0 0.5 0.5 FY23 Bina 0.0 1.5 1.5 FY23 Total 0.0 4.0 4.0 Source: Company, Edelweiss research
109 Edelweiss Securities Limited Oil, Gas and Services
Key risks
Delay in Kochi stabilisation Kochi will kickstart BPCL’s petchem operations with a 0.5MMTPA acrylates plant expected to start operations from FY21. As propylene used to produce acrylates will be supplied from Kochi refinery, this will also help boost GRM at Kochi. Any delay in launch of the petchem plant will, therefore, impact refining as well as petchem profitability at Kochi.
Delay in Mozambique implementation With close to INR20bn invested till date by BPCL in Mozambique and another INR200bn to be invested by FY23E, Mozambique is a sizeable capital commitment for the company. With it capturing the entire spread between production cost and end-user price for over 1MTPA of gas as BPCL’s share, this will be a material contributor to the group’s earnings. Any delay in start of production of gas from this field will, therefore, materially impact earnings.
Return of regulation of auto fuels Although we expect the regime of deregulation to continue under the ruling government, a spate of state elections in 2019 may herald a return of regulation of auto fuel prices, especially in the face of high oil prices. Additionally, LPG subsidies of INR250bn are pending with the central government and are scheduled to be repaid in FY20. Any delay in repayment will add to the interest burden of OMCs.
Government’s stake sale overhang The government recently announced its intent to sell its stake in public sector enterprises to 41% compared to the earlier floor of 51%. This is a potential overhang on BPCL as the government currently owns 53%.
110 Edelweiss Securities Limited Bharat Petroleum Corporation
Company Description BPCL is a leading player in the Indian petroleum industry with operations in both refining and marketing segments. India’s Leading Oil and Gas Company with presence across the Hydrocarbon Value Chain. It has commissioned its 6MMT expansion of its Bina refinery. BPCL is a leading Player with a Diversified product portfolio and a well-established Marketing and Distribution network
Investment Theme Normally BPCL’s refining margins have exhibited less volatility compared to the other oil marketing companies. We expect global refining margins to improve led by capacity closures offsetting capacity additions.
BPCL’s Bina refinery is of higher complexity and will have higher refining margins. The refinery has stabilized and is positively contribution to BPCL's bottomline. Stabilization of Kochi by H2CY19 will also boost profitability.
Discoveries in Mozambique and Brazil provide good opportunity for company to enhance its footprint in the E&P space and lower the impact of under-recoveries in the long run.
Key Risks Although we expect the regime of deregulation to continue under the ruling government, a spate of state elections in 2019 may herald a return of regulation of auto fuel prices, especially in the face of high oil prices.
The government recently announced its intent to sell its stake in public sector enterprises to 41% compared to the earlier floor of 51%. This is a potential overhang on BPCL as the government currently owns 53%.
Country risk in areas of its E&P operations, especially in Mozambique, where the industry ecosystem and regulations are still in a nascent stage.
111 Edelweiss Securities Limited Oil, Gas and Services Financial Statements Key Assumptions Income statement (INR mn) Year to March FY18 FY19 FY20E FY21E Year to March FY18 FY19 FY20E FY21E Macro Net revenue 2,357,698 2,982,256 2,894,466 3,038,255 GDP(Y-o-Y %) 6.5 7.1 7.6 7.6 Materials costs 2,021,117 2,611,425 2,502,297 2,604,979 Inflation (Avg) 3.8 4.0 4.5 4.5 Gross profit 336,581 370,831 392,169 433,276 Repo rate (exit rate) 6.0 6.5 6.8 6.8 Employee costs 37,485 39,848 43,090 46,594 USD/INR (Avg) 64.5 69.9 72.0 72.0 Other Expenses 147,369 179,861 188,483 204,784 Sector EBITDA 151,727 151,122 160,596 181,898 Brent Crude (USD/bbl) 57.6 70.2 65.0 65.0 Depreciation 28,850 34,178 42,821 44,621 Under-recovery (INR bn) 282 547 596 598 EBIT 122,877 116,945 117,775 137,277 % sharing by Govt 100.0 89.0 82.7 82.3 Less: Interest Expense 11,857 17,640 19,126 20,776 % sharing by upstream - 11.0 17.3 17.7 Add: Other income 17,827.2 20,375.4 20,452 20,231 Company Profit Before Tax 128,846 119,681 119,102 136,731 Refining Less: Provision for Tax 43,816 43,775 45,199 50,396 Refining thrput (mmt) 29 31 30 31 Less: Minority Interest 7,833 7,256 6,382 6,180 GRM (USD/bbl) 6.8 4.6 7.2 7.8 Associate profit share 12,889 9,373 14,450 14,757 Opex (USD/bbl) 1.6 2.3 2.5 2.7 Reported Profit 90,086 78,023 81,972 94,912 Marketing Adjusted Profit 90,086 78,023 81,972 94,912 Export sales (mmt) 2.0 1.9 1.5 1.2 Shares o /s (mn) 1,967 1,967 1,967 1,967 Tot dom. sales (mmt) 41.2 43.1 44.5 46.8 Adjusted Basic EPS 45.8 39.7 41.7 48.3 Gasoline sales (mmt) 7.0 7.4 7.9 8.5 Diluted shares o/s (mn) 1,967 1,967 1,967 1,967 Diesel sales (mmt) 20.1 20.4 21.2 22.2 Adjusted Diluted EPS 45.8 39.7 41.7 48.3 Nor. gross mgn (INR/mt) 4,346 5,358 4,850 5,093 Adjusted Cash EPS 67.9 64.0 63.4 70.9 Pipelines Dividend per share (DPS) 21.0 19.0 18.7 21.6 Ppl thrput (BTKM) 6.0 6.0 6.0 6.0 Dividend Payout Ratio(%) 53.5 55.9 52.3 52.2 Ppl EBITDA INR/mmt/km 1.0 1.0 1.0 1.1
Financial assumptions Common size metrics Avg. Interest rate (%) 3.6 5.0 5.0 5.0 Year to March FY18 FY19 FY20E FY21E Gross debt (INR bn) 234 272 330 389 Materials costs 85.7 87.6 86.5 85.7 Capex (INR bn) 70 94 123 166 Staff costs 1.6 1.3 86.51.5 1.5 Cash conversion cycle 22 16 14 14 S G & A expenses 6.3 6.0 6.5 6.7 Operating expenses 93.6 94.9 94.5 94.0 Depreciation 1.2 1.1 1.5 1.5 Interest Expense 0.5 0.6 0.7 0.7 EBITDA margins 6.4 5.1 5.5 6.0 Net Profit margins 4.2 2.9 3.1 3.3
Growth ratios (%) Year to March FY18 FY19 FY20E FY21E Revenues 17.2 26.5 (2.9) 5.0 EBITDA 10.4 (0.4) 6.3 13.3 PBT 1.0 (7.1) (0.5) 14.8 Adjusted Profit 3.3 (13.4) 5.1 15.8 EPS 3.3 (13.4) 5.1 15.8
112 Edelweiss Securities Limited Bharat Petroleum Corporation
Balance sheet (INR mn) Cash flow metrics As on 31st March FY18 FY19 FY20E FY21E Year to March FY18 FY19 FY20E FY21E Share capital 19,669 19,669 19,669 19,669 Operating cash flow 110,684 115,873 102,560 153,463 Reserves & Surplus 346,517 367,978 391,416 421,685 Financing cash flow (40,172) (18,644) 70,294 (27,450) Shareholders' funds 366,186 387,647 411,085 441,354 Investing cash flow (70,655) (91,802) (140,306) (163,855) Minority Interest 19,051 20,700 27,082 33,262 Net cash Flow (143) 5,427 32,549 (37,842) Long term borrowings 289,043 343,156 539,112 599,112 Capex (78,355) (109,727) (160,759) (184,086) Short term borrowings 80,930 85,990 37,988 35,958 Dividend paid (43,676) (60,176) (58,534) (64,643) Total Borrowings 369,973 429,145 577,100 635,069
Long Term Liabilities 17,684 18,783 18,783 18,783 Profitability and efficiency ratios Def. Tax Liability (net) 55,224 67,920 80,960 94,247 Year to March FY18 FY19 FY20E FY21E Sources of funds 828,117 905,413 1,096,227 1,203,933 ROAE (%) 27.5 21.5 20.9 22.2 Gross Block 519,125 590,407 616,177 650,303 ROACE (%) 15.3 12.7 11.6 11.3 Net Block 452,607 489,710 472,659 462,165 Inventory Days 39 32 34 33 Capital work in progress 98,756 136,547 144,938 294,898 Debtors Days 8 7 9 9 Intangible Assets 2,784 3,436 130,034 130,034 Payable Days 22 21 26 26 Total Fixed Assets 554,147 629,693 747,631 887,096 Cash Conversion Cycle 25 18 17 16 Non current investments 182,753 191,078 205,528 220,286 Current Ratio 1.2 1.2 1.3 1.2 Cash and Equivalents 68,031 64,616 97,165 59,323 Gross Debt/EBITDA 2.4 2.8 3.6 3.5 Inventories 225,295 229,349 230,619 239,133 Gross Debt/Equity 1.0 1.1 1.3 1.3 Sundry Debtors 52,048 69,063 76,927 80,287 Adjusted Debt/Equity 1.0 1.1 1.3 1.3 Loans & Advances 43,436 55,139 65,259 67,404 Net Debt/Equity 0.8 0.9 1.1 1.2 Other Current Assets 78,496 129,130 102,102 100,004 Interest Coverage Ratio 10.4 6.6 6.2 6.6 Current Assets (ex cash) 399,275 482,680 474,908 486,828
Trade payable 132,319 173,847 182,337 189,767 Operating ratios Other Current Liab 243,769 288,807 246,668 259,832 Year to March FY18 FY19 FY20E FY21E Total Current Liab 376,088 462,655 429,005 449,600 Total Asset Turnover 3.1 3.4 2.9 2.6 Net Curr Assets-ex cash 23,187 20,025 45,903 37,228 Fixed Asset Turnover 4.5 5.0 4.2 3.7 Uses of funds 828,117 905,413 1,096,227 1,203,933 Equity Turnover 6.6 7.5 6.8 6.7 BVPS (INR) 186.2 197.1 209.2 224.0
Valuation parameters
Free cash flow (INR mn) Year to March FY18 FY19 FY20E FY21E Year to March FY18 FY19 FY20E FY21E Adj. Diluted EPS (INR) 45.8 39.7 41.7 48.3 Reported Profit 90,086 78,023 81,972 94,912 Y-o-Y growth (%) 3.3 (13.4) 5.1 15.8 Add: Depreciation 28,850 34,178 42,821 44,621 Adjusted Cash EPS (INR) 67.9 64.0 63.4 70.9 Interest (Net of Tax) 7,825 11,188 11,868 13,119 Diluted P/E (x) 7.5 8.6 8.2 7.1 Others (3,336) 7,007 (6,813) (6,393) P/B (x) 1.8 1.7 1.6 1.5 Less: Changes in WC 12,742 14,523 27,287 (7,204) EV / Sales (x) 0.4 0.4 0.4 0.3 Operating cash flow 110,684 115,873 102,560 153,463 EV / EBITDA (x) 6.6 7.0 6.6 5.8 Less: Capex 78,355 109,727 160,759 184,086 Dividend Yield (%) 6.1 5.5 5.5 6.3 Free Cash Flow 32,328 6,146 (58,198) (30,623) EV 995,633 1,059,870 1,059,870 1,059,870
Peer comparison valuation Market cap Diluted P/E (X) EV / EBITDA (X) ROAE (%) Name (USD mn) FY20E FY21E FY20E FY21E FY20E FY21E Bharat Petroleum Corporation 10,383 8.2 7.1 6.6 5.8 20.9 22.2 Hindustan Petroleum Corporation 5,149 5.6 4.7 5.2 4.3 20.3 21.9 Indian Oil Corporation 16,352 6.4 5.1 5.2 4.4 16.1 18.6 Median - 6.3 5.0 6.0 5.6 20.3 21.9 AVERAGE - 6.7 5.6 6.1 5.6 19.2 21.0 Source: Edelweiss research
113 Edelweiss Securities Limited Oil, Gas and Services
Additional Data Directors Data D. Rajkumar Chairman & Managing Director S Ramesh Director - Marketing R Ramachandran Director - Refineries S P Gathoo Director - HR P H Kurian Government Director Anant Kumar Singh Government Director K Sivakumar Director - Finance Rajesh Mangal Independent Director Deepak Bhojwani Independent Director Gopal Nanda Independent Director
Auditors - M/s. CNK & Associates LLP, M/s. Haribhakti & Co. LLP *as per last annual report
Holding – Top10 Perc. Holding Perc. Holding Government of india 53.3 Bpcl trust for inves 9.33 Life insurance corp 5.88 Hdfc asset managemen 3.26 Vanguard group 1.69 Sbi funds management 1.51 Blackrock 1.46 Ubs 0.91 Reliance capital tru 0.86 Franklin resources 0.8
*in last one year
Bulk Deals Data Acquired / Seller B/S Qty Traded Price
No Data Available
*in last one year
Insider Trades Reporting Data Acquired / Seller B/S Qty Traded 11 Mar 2019 President Of India Sell 13849907.00
*in last one year
114 Edelweiss Securities Limited COMPANY UPDATE
HINDUSTAN PETROLEUM CORPORATION
Integration gains
India Equity Research| Oil, Gas and Services COMPANYNAME
Hindustan Petroleum Corporation (HPCL) ranks second in our pecking order EDELWEISS 4D RATINGS due to mega refining expansion and inexpensive valuations: 1) Highest Absolute Rating HOLD refining growth: With Visakh expansion starting from FY22E, we expect Rating Relative to Sector Performer HPCL to post highest throughput growth at 51% over FY19-23E. We also Risk Rating Relative to Sector Low expect GRMs to rise 56% over FY19-21E to USD7.8/bbl due to IMO-effect Sector Relative to Market Equalweight and normalising gasoline cracks; 2) Reduced volatility: Greater self- sufficiency of refined products will lower earnings volatility by cutting exposure to sensitive marketing; 3) Bottom upgradation: Highest upside MARKET DATA (R: HPCL.BO, B: HPCL IN) from upgradation of highest share of negative margin products (HPCL: 14% CMP : INR 242 BPCL: 11% IOCL: 13%); and 4) Compelling valuation: At 4.3x FY21E Target Price : INR 348 52-week range (INR) : 334 / 163 EV/EBITDA, valuations are at a 40% discount to long-term average as well as factoring negative terminal growth rate. We hike our SOTP-based TP by Share in issue (mn) : 1,523.8 M cap (INR bn/USD mn) : 368 / 5,149 55% to INR348 as we bring division-wise target EV/EBIDTA multiples on par Avg. Daily Vol.BSE/NSE(‘000) : 7,592.5 with BPCL following enhanced integration benefits, and upgrade to ‘BUY’.
SHARE HOLDING PATTERN (%) Highest refining expansion amongst OMCs Current Q4FY19 Q3FY19 HPCL’s refining throughput is poised to jump 51% by FY23E following expansions at Promoters * - - - Visakh and Mumbai. Consequently, refining EBITDA share will increase to 34% by FY21E MF's, FI's & BK’s 17.2 17.1 17.6 from 17% in FY19. This will reduce marketing exposure concerns, where earnings are FII's 19.6 18.6 19.2 susceptible to regulatory intervention and hence high volatility. We estimate refining Others 63.1 64.3 63.2 EBITDA to post 52% CAGR over FY19-21E. * Promoters pledged shares : NIL (% of share in issue)
Enhanced in-house refining to improve profitability The company had the highest product purchase cost in its marketing arm at 1.9x crude in PRICE PERFORMANCE (%) EW O & G FY19 (BPCL: 1.7x, IOCL: 1.5x) due to external purchase of oil products. As the refining Stock Nifty Index deficit narrows, product purchase costs can reduce 18% from current level. HPCL is also planning to completely convert negative margin bottoms (fuel oil) to high margin light 1 month (15.1) (8.1) (12.9) and middle distillates, leading to a structural improvement in GRM. 3 months (14.4) (5.6) (16.4) 12 months (15.5) (4.7) (16.3)
Outlook & valuation: Value-accretive restructuring; upgrade to ‘BUY’ Greater integration between refining and marketing as well as enhancement of refining yields shall boost profitability and reduce risk. Valuations are compelling at 4.3x FY21E EV/EBITDA and a dividend yield of 8.3% (FY20E). We upgrade to ‘BUY’ from ‘HOLD’ with revised TP of INR348. Key risks: Escalation of dispute with ONGC over control, regulation of marketing margin. Financials (INR mn)
FY18 FY19 FY20E FY21E Year to March Jal Irani
Net revenue 2,186,469 2,754,734 2,895,993 3,044,482 +91 22 6620 3087 EBITDA 98,502 115,671 109,878 133,561 [email protected]
Adjusted Profit 72,183 66,906 64,944 77,259 Vijayant Gupta Adjusted diluted EPS (INR) 47.3 43.9 42.6 50.6 +91 22 4040 7402 Diluted P/E (x) 5.1 5.5 5.6 4.7 [email protected]
EV/EBITDA (x) 5.2 5.0 5.2 4.3 ROAE (%) 31.0 23.9 20.3 21.9 August 22, 2019
Edelweiss Research is also available on www.edelresearch.com, Edelweiss Securities Limited Bloomberg EDEL
Oil, Gas and Services
Highest refining capacity growth at 51% over FY19-23E With capacity expansion at Mumbai and Visakh refineries, we estimate HPCL to clock the highest throughput CAGR amongst OMCs at 11% over the next five years. While Mumbai’s capacity will be expanded from 7.5MMTPA to 9.5MMTPA in FY21E, Visakh’s will expand from 8.3MMTPA to 15MMTPA and be completed in FY22 (refer to charts 1&2). Consequently, HPCL’s capacity will jump 51% from 16.2MMTPA in FY19 to 24.5MMTPA by FY23E.
Chart 1: Refining throughput will jump 51% by FY23E Chart 2: Retail market share steady at 24%, among OMCs 25 9.0 50 23.9
40 23.8 20 8.0 30 23.6
15 7.0 (%) 20 23.5
10 6.0 ($/bbl)
10 23.3
Capacity (MMT) Capacity Marketing Sales (MMT) Sales Marketing 5 5.0
0 23.2 FY18
0 4.0 FY17
FY20E FY19E FY21E FY22E FY23E
FY17 FY18 FY19
FY20E FY21E FY22E FY23E Mumbai Visakh GRM (RHS) MS HSD LPG SKO Others Market Share
Source: Company, Edelweiss research
GRM to surge past FY18 level by FY21E Along with throughput growth, GRM recovery will drive refining earnings—we estimate refining EBITDA to post 52% CAGR till FY21E. We expect HPCL’s GRM to spike 56% over FY19-21E led by a surge in diesel cracks due to IMO along with normalisation of gasoline cracks (refer to table 1).
Currently, HPCL has the lowest proportion of high margin distillate yield (57%, adjusted for fuel losses) at its Mumbai and Visakh refineries. However, management has stated that refineries are being upgraded to replace heavy distillates with lighter products along with lower fuel losses. Consequently, we believe unadjusted distillate yields (ex fuel losses) could rise to over 70% versus the current level of 64% (refer to chart 3).
Table 1: GRM estimated to jump 56% over FY19-21 led by a surge in gasoline and diesel cracks Product Slate % Product (New, from CY 2021) Slate % US$/bbl CY 2017 CY 2018 CY 2019E CY 2020E CY 2021E CY 2022E CY 2023E 20.3 18.3 Gasoline 12.0 6.3 10.0 14.0 12.0 11.0 10.0 46.1 41.1 Diesel 13.2 14.4 16.0 21.0 19.0 18.0 17.0 2.7 9.7 HSFO (5.4) (4.2) (12.0) (27.0) (25.0) (22.0) (21.0) 5.4 5.4 Jet/Kero 13.3 14.9 15.0 16.0 15.0 14.0 14.0 4.6 4.6 LPG (25.2) (23.8) (22.0) (19.0) (20.0) (20.0) (21.0) 3.4 3.4 Naphtha 0.2 (3.9) 0.1 0.2 0.1 0.0 0.0 HPCL 7.4 5.0 7.2 7.8 7.5 7.7 7.8 Source: FGE, MoPNG, Edelweiss research Note: CY20 refers to year ending March 21 for OMCs
116 Edelweiss Securities Limited Hindustan Petroleum Corporation
Chart 3: Refinery upgradation will propel HPCL’s refineries to the sweet spot of high distillate yield and higher GRM
HMEL, Bhatinda The sweet spot: High distillate, High GRM 12.2 NRL, Numaligarh RIL, Jamnagar BORL, Bina
10.4 IOC, Koyali
HPCL, Mumbai EOL, Vadinar
GRM, $/bblGRM, 8.6 IOC, Digbol MRPL, Mangalore IOC, Panipat IOC, Mathura IOC, Haldia IOC, Guwahati BPCL, Mumbai 6.8 IOC, Paradip IOC, Barauni HPCL, Vishak IOC, Bongaigaon CPCL BPCL, Kochi
5.0 40.0 45.0 50.0 55.0 60.0 65.0 70.0 75.0 80.0 85.0 90.0
Distillate yield (%) Distillate yield= gasoline+diesel+jet fuel+kerosene-fuel losses Source: Company, Edelweiss research
Highest upside from bottom upgradation HPCL also has the highest share of heavy distillates in its product slate (14% in FY18; IOCL: 13%, BPCL: 11%), which earn zero to negative margin (refer to chart 4). Management has indicated these bottoms will be converted to light/middle distillates by FY22-23E, which will lead to significant improvement in GRM.
Chart 4: HPCL to sharply enhance higher margin light & middle distillates 100.0
80.0
60.0
40.0
20.0 As % of overallproductofslate % As 0.0 FY18 FY23E Petroleum Coke Others SKO Lube Oil ATF Naphtha LPG Bitumen Fuel& Losses Furnace Oil Gasoline Diesel Source: Company, Edelweiss research
117 Edelweiss Securities Limited Oil, Gas and Services
Refining to drive growth Traditionally, due to the gap between refining throughput and marketing volumes, marketing has accounted for bulk of HPCL’s earnings. In FY19, marketing share surged to 75% due to collapse in GRM. However, as GRM expands, we estimate the refining share to double to 34% by FY21. If the company acquires MRPL and once the new Barmer refinery is commissioned, we expect refining throughput to exceed marketing volumes (refer to charts 5&6).
Chart 5: Refining EBITDA to grow 52% over FY19-21E Chart 6: Refining’s EBITDA share to rise to 34% in FY21E 90 10.0% 100%
72 8.0% 80%
54 6.0% 60%
36 4.0%
40%
EBITDA margin (%) margin EBITDA EBITDA share (%) share EBITDA
Refining EBITDA (INR Bn) (INR EBITDA Refining 18 2.0% 20% 0 0.0%
0%
FY14 FY15 FY16 FY17 FY18 FY19 FY21E FY20E FY14 FY15 FY16 FY17 FY18 FY19 FY20EFY21E EBITDA (INR Mn) EBITDA Margin (RHS) Refining Pipelines Marketing
Source: Company, Edelweiss research
Based on our sensitivity analysis, while a 10% change in GRM will impact EBITDA 7%, a 10% change in marketing margin will lead to 14% change in EBITDA (refer to table 2). This is primarily due to higher marketing volumes compared to refining throughput. Exposure to the politically-sensitive marketing business will dip as the company ramps up refining throughput organically as well as inorganically (refer to chart 7).
Chart 7: GRM to rise 56% over FY19 Table 2: A 10% change in GRM leads to 7% change in EBITDA 12.0 % Change in EBITDA GRM Change -20% -10% 0% 10% 20% 9.6 -20% -40 -34 -28 -22 -16 Marketing -10% -26 -20 -14 -8 -2 7.2 margin 0% -12 -6 0 6 12 change 10% 2 8 14 20 26 20% 16 22 28 34 40
4.8 GRM ( $/bbl) ( GRM
2.4
0.0
FY12 FY15 FY11 FY13 FY14 FY16 FY17 FY18 FY19
FY20E FY21E IOCL BPCL HPCL
Source: Company, Edelweiss research Source: Company, Edelweiss research
118 Edelweiss Securities Limited Hindustan Petroleum Corporation
Barmer mega refinery to accelerate petchem entry HPCL is also planning to set up a 9MT (refining) and 2MT (petchem) plant at Barmer, which is expected to start operations by FY22-23. Estimated to cost USD6bn, the project will be set up as a JV between HPCL (74%) and Rajasthan government (26%). The capital structure will be allocated amongst HPCL (USD1.4bn), Rajasthan government (USD0.6bn) and debt (USD4bn).
Initially, the feedstock mix will be split amongst Vedanta’s Barmer crude oil (1.5MT) and imported Arab mix (7.5MT); after nine years of operations, the feedstock will be fully Arab mix. Barmer will produce BSVI grade fuel with a higher share of light/middle distillates along with ethylene and propylene as feedstock for an integrated petrochemical plant (refer to chart 8).
The 2MT petchem plant will produce PE (1MT) and PP (1MT) from the outset with capacity being further expanded to 3MT by 2025. This will lead to HPCL becoming the largest petchem producer amongst OMCs and the second-largest in India after Reliance.
Aggressive entry in petchem to improve profitability HPCL aims to become the largest petchem OMC with a targeted 6MT output by FY23. Petchem margin tends to be double that of refining (EBITDA margin: 20% plus). With significant portion of petchem consumption being imported in India, there is a large market for HPCL. Although both Bhatinda and Barmer will start only in FY23 and do not factor in our earnings, a successful launch can lead to a re-rating for the company (refer to table 3).
Chart 8: Barmer refinery—Capital structure Table 3: HPCL plans to become the largest OMC petchem producer and 2nd largest Indian producer by FY25 Equity Petchem capacity (MMT) IOCL BPCL HPCL from HPCL Current 2.0 0.0 0.0 24% Upcoming (FY19-25E) Paradip 2.3 Kochi 0.5 Mumbai 2.0 Bina 1.5 Barmer 3.0 Rajasthan Bhatinda 2.0 Govt MRPL 1.0 9% Debt Total 4.3 4.0 6.0 67%
Source: Company, Edelweiss research
Management is also planning to expand pipeline capacity aggressively to cut transportation cost, which is a significant component of opex (FY18 transportation cost at USD3/bbl). With total marketing sales at 38MMTPA and pipeline capacity of mere 30MMTPA, the balance petroleum products are transported through trucks, a more expensive proposition than pipelines (refer to figure 1). As the company expands pipeline capacity, we expect opex to fall, adding to profitability.
119 Edelweiss Securities Limited Oil, Gas and Services
Fig. 1: HPCL is planning to expand pipeline network aggressively in order to cut transportation cost
Source: Company, Edelweiss research
HPCL-MRPL merger to improve profitability With less than half of marketing volumes accounted for by standalone refineries at Mumbai and Visakh, the balance output is purchased externally from HMEL and MRPL. External purchases are bought at a premium to internal purchases; as a result, the marketing arm’s purchase costs have averaged close to 2.0x Brent prices over the past few years (refer to chart 9). Once the HPCL-MRPL merger is completed, HPCL will be able to claim this incremental margin, which should add to profitability (refer to table 4).
120 Edelweiss Securities Limited Hindustan Petroleum Corporation
Chart 9: Post refining expansion, purchase costs will fall… Table 4: …potential 18% dip from higher internal purchases 3.0 Metric Current purchase cost ( as a multiple of 2.4 1.9 crude) 1.8 IOCL purchase cost (used as best standard given equal refining and 1.5 1.2 marketing volumes)
Ratio (x) Ratio Marketing output (Mn barrels) 284 0.6 Potential savings (INR Mn) 451,772 0.0 Marketing purchase costs (INR Mn, FY19) 2,552,070 FY13 FY14 FY15 FY16 FY17 FY18 FY19 % Savings 18% Marketing Sales/Refining Throughput (HPCL) Product Purchase cost/Brent (HPCL) Product Purchase cost/Brent (BPCL) Product Purchase cost/Brent (IOCL)
Source: Company, Edelweiss research
Capex run rate to double on organic expansion We estimate annual capex run rate to double from INR80-90bn in FY18 to INR150bn by FY21 led by refining and marketing expansion as well as equity investments in JVs. While refining throughput will surge 50% by FY23E, refineries are also being upgraded to conform to BSVI fuel norms, leading to a five years’ refining capex of INR314bn. Marketing capex will also surge as management is planning to expand retail outlets by 50% to over 22,000 across India. We believe, multiple JVs across refining and the gas value chain will require significant equity investments—Barmer refinery INR100bn, 5 MT Chhara LNG terminal INR28bn with the balance accounted for by various CGD entities (refer to table 5). Consequently, we expect over INR208bn of investments in various JVs by FY23.
Leverage will increase to fund capex With significant surge in capex, HPCL will need to increase debt to fund this in the absence of sufficient operating cash flows (refer to chart 10). With an INR810bn capex plan over the next five years, we estimate debt to surge from INR205bn in FY18 to INR624bn by FY23E (refer to table 6). However, given the modest leverage across OMCs, we expect rise in net debt-equity to be limited to 1.0x by FY21E.
121 Edelweiss Securities Limited Oil, Gas and Services
Chart 10: Capex surge to INR 810bn over five years to increase Table 5: Equity investments in JVs will keep capex budget leverage elevated over next five years (INR bn) 250 2.0 Capex Projection Project FY19E-FY23E Refining 187 1.6 Mumbai Expansion 42 Visakh Expansion 209 Euro-6 upgradation 63 124 1.2 Total 314 Marketing
61 0.8 (%) Maintenance/expansion 294 (INR bn) (INR JV (2) 0.4 Barmer 100 Chhara 28 (65) 0.0 CGD/Pipelines 80
Total 208
FY17 FY18 FY19
FY21E FY22E FY23E FY20E Overall 816 Capex Free cash flow Net debt-equity Source: Company, Edelweiss research
122 Edelweiss Securities Limited Hindustan Petroleum Corporation
Table 6: HPCL will record the fastest throughput growth till FY23 due to highest capacity expansion FY19-23 FY16 FY17 FY18 FY19 FY20E FY21E FY22E FY23E CAGR (%) Refining Througput (MMT) IOCL 58.0 65.2 69.0 71.8 70.4 74.9 77.9 82.9 3.6 BPCL 24.1 25.4 28.5 31.0 30.3 31.1 31.1 31.1 0.0 HPCL 17.2 17.8 18.2 18.5 17.8 20.2 28.2 28.2 11.1 Throughput Growth (yoy,%) IOCL 8.3 12.4 5.8 4.1 (2.0) 6.4 4.0 6.4 BPCL 3.3 5.3 12.4 8.7 (2.4) 2.6 0.0 0.0 HPCL 6.5 3.3 2.2 1.6 (3.7) 13.6 39.1 0.0 GRM ($/bbl) IOCL 5.1 7.8 8.5 5.4 8.3 8.9 8.7 8.8 12.9 BPCL 6.6 5.3 6.9 4.6 7.2 7.8 7.3 7.5 13.1 HPCL 6.7 6.2 7.4 5.0 7.2 7.8 7.5 7.7 11.3 Marketing sales volume (MMT) IOCL 76.1 78.8 84.3 85.1 86.5 89.5 93.0 96.3 3.1 BPCL 38.4 40.2 43.2 45.0 46.1 48.0 50.2 52.2 3.8 HPCL 34.2 35.2 36.9 38.7 40.0 41.9 43.9 45.8 4.3 Volume Growth (%) IOCL (0.5) 3.6 7.0 0.9 1.6 3.5 3.9 3.5 BPCL 4.8 4.6 7.5 4.1 2.4 4.3 4.5 4.0 HPCL 7.1 3.0 4.8 4.8 3.3 4.7 4.9 4.3 Core Marketing margin (INR/ltr) IOCL 3.8 3.5 3.9 4.6 4.2 4.4 4.6 4.9 1.5 BPCL 4.5 3.6 3.7 4.6 4.2 4.4 4.6 4.8 1.2 HPCL 3.4 3.9 3.6 4.4 4.0 4.2 4.4 4.6 1.3 Source:Companies, Edelweiss research
Valuations at near lows; re-rating underway The potential regulatory interference leading to an adverse hit on profitability of OMCs has taken a serious toll on valuations of OMC. Valuations of HPCL are at near lows; with an FY21E EV/EBITDA at 4.3x and FY21E PER at 4.7x, the stock is trading at ~50% discount to its long-term average. With FY20E dividend yield estimated at 8.3%, we believe there is limited downside from these levels.
Even on consensus earnings estimates, HPCL trades at a significant discount to the long-term average. With our FY21 EBITDA estimate 20% above consensus, our valuation multiple is below consensus (refer to charts 11, 12 & 13).
Using the Gordon growth model and a cost of equity of 12% (refer to charts 14-17), we find that HPCL is factoring negative terminal growth at current market price (refer to table 7). This seems overly conservative given that oil demand alone is set to grow at 5% annually over the next decade.
123 Edelweiss Securities Limited Oil, Gas and Services
Chart 11: Our FY21 EBITDA estimate is 20% above consensus 12.5 +1SD
10.7 +1SD +1SD 8.9
-1SD 7.1 -1SD EV/ EBITDA (x) EBITDA EV/ -1SD 5.3
3.5 BPCL IOCL HPCL
EV/EBITDA Consensus EV/EBITDA (Edel estimates) 10 year avg
Chart 12: At CMP, HPCL is pricing in negative terminal growth
400 365 -4.5% 339 331 0.3% 320 256 240 167 -2.5%
160 132 (INR/share) 80
0
IOCL (CMP)IOCL
BPCL (CMP)BPCL
HPCL (CMP)HPCL
Zerogrowth Zerogrowth Zerogrowth
2.5% Growth 2.5% Growth 4.5%
0.3% Growth 0.3% - -
Chart 13: Our target price is above consensus 600
480
360
240 (INR/share)
120
0 HPCL BPCL IOCL
Low-High Mean Current price Target Price
Source:Companies, Edelweiss research
124 Edelweiss Securities Limited Hindustan Petroleum Corporation
Table 7: HPCL—Sum-of-the-parts target price Base value Base value Base value Particulars (USD bn) (INR bn) (INR/share) HPCL refining (@ EV/EBITDA 5.5x) 3.9 256 168 HPCL marketing (@ EV/EBITDA 4x) 5.2 336 220 HPCL pipelines (@ EV/EBITDA 5.5x) 0.9 61 40 EV of HMEL refinery 49% stake 2.3 153 100 Enterprise value of operating assets 12.4 806 528 Investment value after 30% discount 0.2 16 10 Net debt 4.2 275 180 Equity value 8.2 531 348 Source:Companies, Edelweiss research
Valuation multiples significantly below long-term range
Chart 14: EV/EBITDA versus long-term average Chart 15: PER (x) versus long-term average 16.0 50.0
13.2 +1SD 40.0
10.4
30.0 +1SD
(x) (x) 7.6 20.0
-1SD 4.8 10.0
2.0
0.0 -1SD
2011 2018 2009 2010 2012 2013 2014 2015 2016 2017
2010 2014 2009 2011 2012 2013 2015 2016 2017 2018
EV/EBITDA 10 year average PER 10 year average
Chart 16: PBR(x) versus long-term average Chart 17: Dividend yield (x) versus long-term average 3.5 12.0
2.8 9.6 +1SD
2.1 +1SD 7.2
(x) (x) 1.4 4.8
0.7 2.4 -1SD
0.0 -1SD 0.0
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 P/B 10 year average DIVIDEND YIELD 10 year average
Source: Bloomberg, Edelweiss research
125 Edelweiss Securities Limited Oil, Gas and Services
Valuation multiples significantly below peer average Despite OMCs enjoying superior ROCE and offering significantly higher dividend yields, they trade at a significant discount to peer average. Earnings growth is also expected to pick up riding capacity expansion and margin accretion (refer to tables 8 & 9).
126 Edelweiss Securities Limited Hindustan Petroleum Corporation
5.5
2.0
8.6
5.8
7.5
NA
(%)
-6.6
22.9
17.3
15.1
36.4
10.7
18.9
19.8
75.7
20.5
11.1
10.0
16.0 131.0
FY19-21E EPS CAGR EPS
5.3
8.0
4.6
3.2
2.8
2.2
3.4
2.9
3.8
4.3
3.4
3.9
3.6
6.6
3.5
0.6
7.1
8.3
5.5 7.4
(%)
Div Div
FY20E yield
8.6
8.4
8.2
9.9
7.2
8.8
3.8
5.5
5.7
4.7
7.1
5.1
13.4
10.9
20.7
16.1
17.6
14.5
16.1
17.0 FY21E (x) P/E
0.4
0.2
0.3
0.6
0.5
0.7
0.6
0.2
0.5
0.4
0.4
0.6
1.4
1.8
1.5
0.8
0.8
0.7
0.9
0.7
FY19 D/E (x) D/E
Company,Source:research Edelweiss
8.8
5.1
NA
10.8
18.7
17.5
13.4
13.8
25.3
16.3
18.5
16.7
13.5
13.6
16.3
11.0
21.0
21.9
22.5 18.6
FY21E ROE (%) ROE
7.6
7.5
4.0
7.7
8.5
8.9
8.4
6.5
11.4
12.2
20.3
10.2
13.2
10.6
13.5
11.8
12.4
12.9 11.4
13.0 FY21E
7.5
7.2
3.6
8.0
8.4
7.9
8.5
9.9
5.4
8.1
3.2
11.6
12.6
21.3
10.1
10.9
11.9
12.8 11.7
11.3 FY20E
(%) ROCE
7.5
7.2
3.6
9.4
8.4
7.9
8.5
9.9
5.4
3.1
4.4
-6.0
11.6
13.0
21.3
11.0
12.8
14.7
12.7 10.9 FY19
6.4
4.6
4.9
9.7
9.3
6.2
5.5
7.2
5.9
6.8
4.4
5.7
4.8
4.3 5.7
4.4
10.2
10.8
10.7 10.4
FY21E
6.7
4.7
5.0
7.9
7.6
8.6
7.6
8.8
5.6
8.4
5.6
5.2 6.5
5.2
10.4
10.9
11.1
10.1
11.4 12.5
FY20E
EV/EBITDA( x) EV/EBITDA(
5.4
3.4
3.2
9.4
9.7
7.5
5.8
7.6
9.2
8.2
5.9
5.0
7.0
5.8
10.6
11.9
10.3
14.6 20.1
15.5 FY19
0.5
0.3
3.9
3.5
1.9
7.7
10.3
10.4
51.2
10.4
96.9
50.6
48.0
24.8
3,103
FY21E
0.5
0.3
3.7
3.2
1.7
5.8
7.8
4.5
4.8
32.4
80.4
42.6
41.5
19.8
3,139
FY20E
Diluted EPS (LC) EPS Diluted
0.5
0.3
2.8
2.7
1.0
7.3
5.4
1.9
11.9
66.8
43.9
39.7
18.4
FY19
(13.8)
2,774
420
3,238
8,295
5,700
1,437
5,085
9,938
89,920
26,081
35,194
46,512
36,590
15,927
Mcap
163,270
112,598
mn) (USD
Table 8: Valuation Snapshot Valuation 8: Table
APAC Refining-Mean APAC
Sinopec
Petrochina
VietnamNational Petroleum
APAC Refining APAC
Europe Refining-Mean Europe
Dcc Plc Dcc
Rubis
NesteOyj
Europe Refining Europe
US Refining-MeanUS
ValeroCorp Energy
Phillips66
Marathon Petroleum Corp Marathon
US RefiningUS
India Refining-Mean India
ChennaiPetroleum Ltd Corp
Mangalore Refinery Mangalore Petrochemicals & Ltd
RelianceIndustries Limited
India Refining India
India OMC-Mean India
HindustanPetroleum LimitedCorporation
Bharat Petroleum Bharat LimitedCorporation
IndianOil LimitedCorporation
India OMC India Company
127 Edelweiss Securities Limited Oil, Gas and Services
Table 9: Robust growth in HPCL’s refining and petchem capacity MMTPA Refining Current Expansion Total Year of commissioning Mumbai 7.9 1.6 9.5 FY21 Vizag 8.3 6.7 15.0 FY22 Barmer 0.0 9.0 9.0 FY25 Bhatinda 11.3 0.0 11.3 Total 27.5 17.3 44.8 Petchem Barmer 0.0 3.0 3.0 FY25 Bhatinda 0.0 2.0 2.0 FY23 Mangalore 0.0 1.0 1.0 FY22 Total 0.0 6.0 6.0 Source: Company, Edelweiss research
128 Edelweiss Securities Limited Hindustan Petroleum Corporation
Key risks
The key risk to our thesis is subdued ROCE in the near term as HPCL expands aggressively in capital-intensive, long-gestation refinery and petrochemical businesses. Dispute with ONGC as parent is an impediment as well. Nevertheless, greater integration will add to margin as well as enhance strategic positioning. Moreover, we believe, these risks more than adequately reflect in compelling valuations.
Dispute with ONGC There is an ongoing dispute between the boards of HPCL and ONGC over recognition of the latter as promoter. In addition to diverting management attention, this has also delayed the merger with MRPL (and associated petchem and pipeline unit) which will lead to significant synergies. A cancellation of this merger will materially affect HPCL’s re-rating.
Long gestation projects to dent near-term returns HPCL is diversifying from its core operations of refining and marketing in to LNG, upstream, petrochemicals and CGD projects. These projects will account for a significant portion of incremental capex and take 5-10 years to operationalise. As a result, ROCE will remain capped in the near term (refer to chart 18).
Chart 18: ROCE will remain capped given capex surge 25.0
20.0
15.0
ROCE (%) ROCE 10.0
5.0
0.0 FY17 FY18 FY19 FY20E FY21E FY22E FY23E
Source: Company, Edelweiss research
Spike in leverage HPCL will need to increase borrowings to fund a surge in capex as operating cash flows will be insufficient. Given the INR810bn capex plan over the next five years, we estimate debt to jump from INR205bn in FY18 to INR624bn by FY23 (refer to chart 19).
129 Edelweiss Securities Limited Oil, Gas and Services
Chart 19: HPCL’s leverage will rise as capex surge will lead to negative FCF 250 2.0
187 1.6
124 1.2
61 0.8 (%) (INR bn) (INR
(2) 0.4
(65) 0.0
FY17 FY18 FY19
FY20E FY21E FY22E FY23E Capex Free cash flow Net debt-equity
Source: Company, Edelweiss research
Return of regulation of auto fuels Although we expect the deregulation regime to continue, a spate of state elections in 2019 could herald a return of regulation of auto fuel prices, especially in the face of high oil prices.
Delay in reimbursement of LPG subsidy Additionally, LPG subsidies of INR250bn are pending with the central government and are scheduled to be repaid in FY20. Any delay in repayment will add to the interest burden of OMCs.
130 Edelweiss Securities Limited Hindustan Petroleum Corporation
Company Description HPCL is the third-largest refining company in India in the total sales of petroleum products in the country. The company owns and operates two refineries—Mumbai refinery of 7.9 mtpa capacity and Vizag refinery of 8.3 mtpa capacity. It has a 16.96% equity stake in Mangalore Refineries (a subsidiary of ONGC) with an operable capacity of ~16.23mtpa. It has a ~15,459- strong nation-wide retail outlet network, the second-largest in India after IOCL.
Investment Theme HPCL is an integrated refining and marketing player with a high share in metros, giving it the advantage of higher margins, higher growth rate, and lower competition.
Improving complexity of upcoming refining capacities and modernisation of existing capacities will enable it to earn higher refining margins.
As the refining deficit narrows, product purchase costs can reduce 18% from current level. HPCL is also planning to completely convert negative margin bottoms (fuel oil) to high margin light and middle distillates, leading to a structural improvement in GRM.
Key Risks There is an ongoing dispute between the boards of HPCL and ONGC over recognition of the latter as promoter.
Although we expect the deregulation regime to continue, a spate of state elections in 2019 could herald a return of regulation of auto fuel prices, especially in the face of high oil prices.
Investment in capital-intensive projects that could result in lower returns.
131 Edelweiss Securities Limited Oil, Gas and Services Financial Statements Key Assumptions Income statement (INR mn) Year to March FY18 FY19 FY20E FY21E Year to March FY18 FY19 FY20E FY21E Macro Net revenue 2,186,469 2,754,734 2,895,993 3,044,482 GDP(Y-o-Y %) 6.5 7.1 7.6 7.6 Materials costs 1,944,872 2,480,370 2,629,060 2,741,782 Inflation (Avg) 3.8 4.0 4.5 4.5 Gross profit 241,597 274,364 266,933 302,701 Repo rate (exit rate) 6.0 6.5 6.8 6.8 Employee costs 28,926 29,728 30,550 31,395 USD/INR (Avg) 64.5 69.9 72.0 72.0 Other Expenses 114,169 128,965 126,505 137,744 Sector EBITDA 98,502 115,671 109,878 133,561 Brent Crude (USD/bbl) 57.6 70.2 65.0 65.0 Depreciation 28,344 30,853 34,031 37,362 Under-recovery (INR bn) 282 547 596 773 EBIT 70,158 84,818 75,847 96,199 % sharing by Govt 100.0 89.0 82.7 70.4 Less: Interest Expense 6,179 7,856 8,670 10,196 % sharing by upstream - 11.0 17.3 29.6 Add: Other income 23,905.9 14,133.00 14,339.22 13,619.0 Company Profit Before Tax 87,886 91,095 81,516 99,623 Refining Less: Provision for Tax 28,919 33,486 33,381 39,799 Refining thrput (mmt) 18 19 18 20 Associate profit share 13,216 9,297 16,809 17,435 GRM (USD/bbl) 7.4 5.0 7.2 7.8 Reported Profit 72,183 66,906 64,944 77,259 Opex (USD/bbl) 1.6 2.6 2.8 3.0 Adjusted Profit 72,183 66,906 64,944 77,259 Marketing Shares o /s (mn) 1,526 1,526 1,526 1,526 Export sales (mmt) 0.7 0.8 0.6 0.5 Adjusted Basic EPS 47.3 43.9 42.6 51.7 Tot dom. sales (mmt) 36.2 37.9 39.4 41.4 Diluted shares o/s (mn) 1,526 1,526 1,526 1,526 Gasoline sales (mmt) 6.5 6.9 7.4 7.9 Adjusted Diluted EPS 47.3 43.9 42.6 50.6 Diesel sales (mmt) 17.8 18.1 18.8 19.8 Adjusted Cash EPS 69.0 68.0 64.9 75.1 Nor. gross mgn (INR/mt) 4,168 5,104 4,650 4,883 Dividend per share (DPS) 17.0 15.9 19.9 23.8 Pipelines Dividend Payout Ratio(%) 41.9 42.3 54.6 54.7 Ppl thrput (BTKM) 11.1 11.4 11.4 11.4
Ppl EBITDA INR/mmt/km 1.0 0.9 1.0 1.0 Common size metrics Financial assumptions Year to March FY18 FY19 FY20E FY21E Avg. Interest rate (%) 2.4 3.0 3.5 3.5 Materials costs 89.0 90.0 90.8 95.6 Gross debt (INR bn) 210 251 282 377 Staff costs 1.3 1.1 1.1 1.0 Capex (INR bn) 67 115 158 160 S G & A expenses 5.2 4.7 4.4 4.5 Cash conversion cycle 16 10 8 6 Operating expenses 95.5 95.8 96.2 90.1 Depreciation 1.3 1.1 1.2 1.2 Interest Expense 0.3 0.3 0.3 0.3 EBITDA margins 4.5 4.2 3.8 4.4 Net Profit margins 3.3 2.4 2.2 2.5
Growth ratios (%) Year to March FY18 FY19 FY20E FY21E Revenues 16.9 26.0 5.1 5.1 EBITDA (6.1) 17.4 (5.0) 21.6 PBT (1.0) 3.7 (10.5) 22.2 Adjusted Profit (12.4) (7.3) (2.9) 19.0 EPS (12.4) (7.3) (2.9) 19.0
132 Edelweiss Securities Limited Hindustan Petroleum Corporation
Balance sheet (INR mn) Cash flow metrics As on 31st March FY18 FY19 FY20E FY21E Year to March FY18 FY19 FY20E FY21E Share capital 15,242 15,242 15,242 15,242 Operating cash flow 110,372 78,252 104,604 91,944 Reserves & Surplus 240,082 288,765 319,056 354,828 Financing cash flow (36,292) 18,775 3,047 42,032 Shareholders' funds 255,324 304,007 334,298 370,070 Investing cash flow (73,980) (105,277) (143,634) (146,188) Long term borrowings 96,559 139,087 170,681 266,565 Net cash Flow 101 (8,249) (35,984) (12,212) Short term borrowings 108,794 121,278 136,965 135,712 Capex (67,154) (115,396) (157,973) (159,807) Total Borrowings 205,354 260,365 307,647 402,277 Dividend paid (30,258) (28,379) (35,566) (42,403) Long Term Liabilities 1,141 - - -
Def. Tax Liability (net) 68,048 73,963 73,964 73,965 Profitability and efficiency ratios Sources of funds 529,867 638,334 715,908 846,312 Year to March FY18 FY19 FY20E FY21E Gross Block 463,592 523,875 575,034 631,309 ROAE (%) 31.0 23.9 20.3 21.9 Net Block 382,257 411,686 428,814 447,727 ROACE (%) 17.9 14.7 12.8 12.9 Capital work in progress 40,105 95,187 201,999 305,531 Inventory Days 35 29 29 29 Intangible Assets 4,695 4,729 4,731 4,731 Debtors Days 8 7 6 5 Total Fixed Assets 427,057 511,602 635,544 757,989 Payable Days 27 26 27 27 Non current investments 78,826 92,137 109,859 128,210 Cash Conversion Cycle 16 10 8 7 Cash and Equivalents 63,046 53,023 17,039 4,827 Current Ratio 1.1 1.1 0.9 0.9 Inventories 186,121 204,436 213,385 222,534 Gross Debt/EBITDA 2.1 2.3 2.8 3.0 Sundry Debtors 55,870 56,674 38,351 44,875 Gross Debt/Equity 0.8 0.9 0.9 1.1 Loans & Advances 5,087 19,923 (4,559) (4,559) Adjusted Debt/Equity 0.8 0.9 0.9 1.1 Other Current Assets 80,709 134,789 140,655 146,703 Net Debt/Equity 0.6 0.7 0.9 1.1 Total current assets 327,788 415,822 387,832 409,553 Interest Coverage Ratio 11.4 10.8 8.7 9.4 Trade payable 158,459 190,534 199,580 208,471
Other Current Liab 208,391 243,716 234,785 245,796 Operating ratios Total Current Liab 366,850 434,250 434,365 454,267 Year to March FY18 FY19 FY20E FY21E Net Curr Assets-ex cash (39,062) (18,428) (46,533) (44,713) Total Asset Turnover 4.4 4.7 4.3 3.9 Uses of funds 529,867 638,334 715,908 846,312 Fixed Asset Turnover 5.8 6.9 6.8 6.9 BVPS (INR) 167.4 199.3 219.1 243.0 Equity Turnover 9.4 9.9 9.1 8.6
Free cash flow (INR mn) Valuation parameters Year to March FY18 FY19 FY20E FY21E Year to March FY18 FY19 FY20E FY21E Reported Profit 72,183 66,906 64,944 77,259 Adj. Diluted EPS (INR) 47.3 43.9 42.6 50.6 Add: Depreciation 28,344 30,853 34,031 37,362 Y-o-Y growth (%) (12.4) (7.3) (2.9) 19.0 Interest (Net of Tax) 4,146 4,968 5,119 6,123 Adjusted Cash EPS (INR) 69.0 68.0 64.9 75.1 Others (3,724) (14,537) (27,598) (26,981) Diluted P/E (x) 5.1 5.5 5.6 4.7 Less: Changes in WC (9,423) 9,938 (28,106) 1,819 P/B (x) 1.4 1.2 1.1 1.0 Operating cash flow 110,372 78,252 104,604 91,944 EV / Sales (x) 0.2 0.2 0.2 0.2 Less: Capex 67,154 115,396 157,973 159,807 EV / EBITDA (x) 5.2 5.0 5.2 4.3 Free Cash Flow 43,219 (37,144) (53,369) (67,863) Dividend Yield (%) 7.1 6.6 8.3 9.9 EV 508,450 573,484 573,484 573,484
Peer comparison valuation Market cap Diluted P/E (X) EV / EBITDA (X) ROAE (%) Name (USD mn) FY20E FY21E FY20E FY21E FY20E FY21E Hindustan Petroleum Corporation 5,149 5.6 4.7 5.2 4.3 20.3 21.9 Bharat Petroleum Corporation 10,383 8.2 7.1 6.6 5.8 20.9 22.2 Indian Oil Corporation 16,352 6.4 5.1 5.2 4.4 16.1 18.6 Reliance Industries 113,118 15.9 13.2 10.2 7.6 11.0 11.0 Median - 7.3 6.1 6.6 6.2 18.2 20.5 AVERAGE - 9.0 7.5 7.1 6.0 17.1 18.6 Source: Edelweiss research
133 Edelweiss Securities Limited Oil, Gas and Services
Additional Data Directors Data M.K.Surana Chairman & Managing Director B K Namdeo Director - Refineries J. Ramaswamy Director - Finance Pushp Kumar Joshi Director - HR Y K Gawali Director - Marketing Sandeep Poundrik Non Executive Director Urvashi Sadhwani Part time Director Ram Niwas Jain Part time Director
Auditors - BK Khare & Co, CVK Associates *as per last annual report
Holding – Top10 Perc. Holding Perc. Holding Oil & natural gas co 51.11 Life insurance corp 3.74 Hdfc asset managemen 3.64 Vanguard group 1.52 Blackrock 1.49 Reliance capital tru 1.38 Franklin resources 1.25 Mirae asset global i 1.09 Motilal oswal asset 0.99 Sbi funds management 0.96
*in last one year
Bulk Deals Data Acquired / Seller B/S Qty Traded Price 28 Mar 2019 SBI MUTUAL FUND A/C - SBI ETF NIFTY - SCHEME 483 SELL 8191222 272.25
*in last one year
Insider Trades Reporting Data Acquired / Seller B/S Qty Traded
No Data Available
*in last one year
134 Edelweiss Securities Limited RATING & INTERPRETATION Hindustan Petroleum Corporation
Company Absolute Relative Relative Company Absolute Relative Relative reco reco risk reco reco Risk Bharat Petroleum Corporation BUY SO M GAIL (INDIA) BUY SP L Gujarat Gas BUY SO M Gujarat State Petronet BUY SO M Hindustan Petroleum Corporation HOLD SP L Indian Oil Corporation BUY SO M Indraprastha Gas BUY SO M Mahanagar Gas Ltd BUY SO H ONGC BUY SO L Petronet LNG HOLD SP L Reliance Industries BUY SO M
ABSOLUTE RATING
Ratings Expected absolute returns over 12 months
Buy More than 15%
Hold Between 15% and - 5%
Reduce Less than -5%
RELATIVE RETURNS RATING
Ratings Criteria Sector Outperformer (SO) Stock return > 1.25 x Sector return
Sector Performer (SP) Stock return > 0.75 x Sector return
Stock return < 1.25 x Sector return
Sector Underperformer (SU) Stock return < 0.75 x Sector return
Sector return is market cap weighted average return for the coverage universe within the sector
RELATIVE RISK RATING
Ratings Criteria
Low (L) Bottom 1/3rd percentile in the sector
Medium (M) Middle 1/3rd percentile in the sector
High (H) Top 1/3rd percentile in the sector
Risk ratings are based on Edelweiss risk model
SECTOR RATING
Ratings Criteria Overweight (OW) Sector return > 1.25 x Nifty return
Equalweight (EW) Sector return > 0.75 x Nifty return
Sector return < 1.25 x Nifty return
Underweight (UW) Sector return < 0.75 x Nifty return
135 Edelweiss Securities Limited Oil, Gas and Services
Edelweiss Securities Limited, Edelweiss House, off C.S.T. Road, Kalina, Mumbai – 400 098. Board: (91-22) 4009 4400, Email: [email protected]
Aditya Narain Head of Research [email protected]
Coverage group(s) of stocks by primary analyst(s): Oil, Gas and Services Bharat Petroleum Corporation, GAIL (INDIA), Gujarat Gas, Gujarat State Petronet, Hindustan Petroleum Corporation, Indraprastha Gas, Indian Oil Corporation, Mahanagar Gas Ltd, ONGC, Petronet LNG, Reliance Industries
Recent Research
Date Company Title Price (INR) Recos
13 -Aug-19 ONGC Lower lifting costs pump up 128 Buy performance; Result Update 13-Aug-19 Bharat Encore on marketing margin 343 Buy Petroleum beat; Corporation Result Update 13-Aug-19 Reliance Of value unlocking and 1,162 Buy Industries deleveraging; Company Update
Distribution of Ratings / Market Cap Edelweiss Research Coverage Universe Rating Interpretation
Buy Hold Reduce Total Rating Expected to
Rating Distribution* 161 67 11 240 Buy appreciate more than 15% over a 12-month period * 1stocks under review Hold appreciate up to 15% over a 12-month period > 50bn Between 10bn and 50 bn < 10bn 743 Reduce depreciate more than 5% over a 12-month period Market Cap (INR) 156 62 11 594
446
(INR) 297
149
-
14
14 14
14 14
14
14
14
14
14
14
14
-
- -
-
-
-
-
- -
- -
-
Jul
Jan
Jun
Oct
Apr
Sep Feb
Dec
Aug Nov
Mar May
136 Edelweiss Securities Limited
Hindustan Petroleum Corporation
One year price chart
175 450
160 400
145 350 (INR) 130 (INR) 300
115 250
100 200
19
18 19
19
19
18
18 19
19
19
18 19
18
19
18
19
18
18 19
19
19
18
18
19
19
19
-
- -
-
-
- -
-
-
-
- -
-
-
-
-
-
- -
-
-
-
-
-
-
-
Jul
Jul
Jan
Jan
Jun
Oct
Jun
Apr
Oct
Sep Feb
Apr
Sep Feb
Aug Aug
Aug Aug
Dec
Dec
Nov
Nov
Mar
Mar
May May Indian Oil Corporation Bharat Petroleum Corporation
350
310
270
(INR) 230
190
150
19
18 19
19
18
19
18 19
19
18
18
19
19
-
- -
-
-
-
- -
-
-
-
-
-
Jul
Jan
Jun
Oct
Apr
Sep Feb
Aug Aug
Dec
Nov
Mar May Hindustan Petroleum Corporation
137 Edelweiss Securities Limited Oil, Gas and Services
DISCLAIMER Edelweiss Securities Limited (“ESL” or “Research Entity”) is regulated by the Securities and Exchange Board of India (“SEBI”) and is licensed to carry on the business of broking, depository services and related activities. The business of ESL and its Associates (list available on www.edelweissfin.com) are organized around five broad business groups – Credit including Housing and SME Finance, Commodities, Financial Markets, Asset Management and Life Insurance.
This Report has been prepared by Edelweiss Securities Limited in the capacity of a Research Analyst having SEBI Registration No.INH200000121 and distributed as per SEBI (Research Analysts) Regulations 2014. This report does not constitute an offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction. Securities as defined in clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956 includes Financial Instruments and Currency Derivatives. The information contained herein is from publicly available data or other sources believed to be reliable. This report is provided for assistance only and is not intended to be and must not alone be taken as the basis for an investment decision. The user assumes the entire risk of any use made of this information. Each recipient of this report should make such investigation as it deems necessary to arrive at an independent evaluation of an investment in Securities referred to in this document (including the merits and risks involved), and should consult his own advisors to determine the merits and risks of such investment. The investment discussed or views expressed may not be suitable for all investors.
This information is strictly confidential and is being furnished to you solely for your information. This information should not be reproduced or redistributed or passed on directly or indirectly in any form to any other person or published, copied, in whole or in part, for any purpose. This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject ESL and associates / group companies to any registration or licensing requirements within such jurisdiction. The distribution of this report in certain jurisdictions may be restricted by law, and persons in whose possession this report comes, should observe, any such restrictions. The information given in this report is as of the date of this report and there can be no assurance that future results or events will be consistent with this information. This information is subject to change without any prior notice. ESL reserves the right to make modifications and alterations to this statement as may be required from time to time. ESL or any of its associates / group companies shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. ESL is committed to providing independent and transparent recommendation to its clients. Neither ESL nor any of its associates, group companies, directors, employees, agents or representatives shall be liable for any damages whether direct, indirect, special or consequential including loss of revenue or lost profits that may arise from or in connection with the use of the information. Our proprietary trading and investment businesses may make investment decisions that are inconsistent with the recommendations expressed herein. Past performance is not necessarily a guide to future performance .The disclosures of interest statements incorporated in this report are provided solely to enhance the transparency and should not be treated as endorsement of the views expressed in the report. The information provided in these reports remains, unless otherwise stated, the copyright of ESL. All layout, design, original artwork, concepts and other Intellectual Properties, remains the property and copyright of ESL and may not be used in any form or for any purpose whatsoever by any party without the express written permission of the copyright holders.
ESL shall not be liable for any delay or any other interruption which may occur in presenting the data due to any reason including network (Internet) reasons or snags in the system, break down of the system or any other equipment, server breakdown, maintenance shutdown, breakdown of communication services or inability of the ESL to present the data. In no event shall ESL be liable for any damages, including without limitation direct or indirect, special, incidental, or consequential damages, losses or expenses arising in connection with the data presented by the ESL through this report.
We offer our research services to clients as well as our prospects. Though this report is disseminated to all the customers simultaneously, not all customers may receive this report at the same time. We will not treat recipients as customers by virtue of their receiving this report.
ESL and its associates, officer, directors, and employees, research analyst (including relatives) worldwide may: (a) from time to time, have long or short positions in, and buy or sell the Securities, mentioned herein or (b) 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 subject company/company(ies) discussed herein or act as advisor or lender/borrower to such company(ies) or have other potential/material conflict of interest with respect to any recommendation and related information and opinions at the time of publication of research report or at the time of public appearance. ESL may have proprietary long/short position in the above mentioned scrip(s) and therefore should be considered as interested. The views provided herein are general in nature and do not consider risk appetite or investment objective of any particular investor; readers are requested to take independent professional advice before investing. This should not be construed as invitation or solicitation to do business with ESL.
138 Edelweiss Securities Limited Hindustan Petroleum Corporation
ESL or its associates may have received compensation from the subject company in the past 12 months. ESL or its associates may have managed or co-managed public offering of securities for the subject company in the past 12 months. ESL or its associates may have received compensation for investment banking or merchant banking or brokerage services from the subject company in the past 12 months. ESL or its associates may have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company in the past 12 months. ESL or its associates have not received any compensation or other benefits from the Subject Company or third party in connection with the research report. Research analyst or his/her relative or ESL’s associates may have financial interest in the subject company. ESL and/or its Group Companies, their Directors, affiliates and/or employees may have interests/ positions, financial or otherwise in the Securities/Currencies and other investment products mentioned in this report. ESL, its associates, research analyst and his/her relative may have other potential/material conflict of interest with respect to any recommendation and related information and opinions at the time of publication of research report or at the time of public appearance. Participants in foreign exchange transactions may incur risks arising from several factors, including the following: ( i) exchange rates can be volatile and are subject to large fluctuations; ( ii) the value of currencies may be affected by numerous market factors, including world and national economic, political and regulatory events, events in equity and debt markets and changes in interest rates; and (iii) currencies may be subject to devaluation or government imposed exchange controls which could affect the value of the currency. Investors in securities such as ADRs and Currency Derivatives, whose values are affected by the currency of an underlying security, effectively assume currency risk. Research analyst has served as an officer, director or employee of subject Company: No ESL has financial interest in the subject companies: No ESL’s Associates may have actual / beneficial ownership of 1% or more securities of the subject company at the end of the month immediately preceding the date of publication of research report. Research analyst or his/her relative has actual/beneficial ownership of 1% or more securities of the subject company at the end of the month immediately preceding the date of publication of research report: No ESL has actual/beneficial ownership of 1% or more securities of the subject company at the end of the month immediately preceding the date of publication of research report: No Subject company may have been client during twelve months preceding the date of distribution of the research report. There were no instances of non-compliance by ESL on any matter related to the capital markets, resulting in significant and material disciplinary action during the last three years except that ESL had submitted an offer of settlement with Securities and Exchange commission, USA (SEC) and the same has been accepted by SEC without admitting or denying the findings in relation to their charges of non registration as a broker dealer. A graph of daily closing prices of the securities is also available at www.nseindia.com Analyst Certification: The analyst for this report certifies that all of the views expressed in this report accurately reflect his or her personal views about the subject company or companies and its or their securities, and no part of his or her compensation was, is or will be, directly or indirectly related to specific recommendations or views expressed in this report.
Additional Disclaimers
Disclaimer for U.S. Persons This research report is a product of Edelweiss Securities Limited, which is the employer of the research analyst(s) who has prepared the research report. The research analyst(s) preparing the research report is/are resident outside the United States (U.S.) and are not associated persons of any U.S. regulated broker-dealer and therefore the analyst(s) is/are not subject to supervision by a U.S. broker-dealer, and is/are not required to satisfy the regulatory licensing requirements of FINRA or required to otherwise comply with U.S. rules or regulations regarding, among other things, communications with a subject company, public appearances and trading securities held by a research analyst account.
This report is intended for distribution by Edelweiss Securities Limited only to "Major Institutional Investors" as defined by Rule 15a-6(b)(4) of the U.S. Securities and Exchange Act, 1934 (the Exchange Act) and interpretations thereof by U.S. Securities and Exchange Commission (SEC) in reliance on Rule 15a 6(a)(2). If the recipient of this report is not a Major Institutional Investor as specified above, then it should not act upon this report and return the same to the sender. Further, this report may not be copied, duplicated and/or transmitted onward to any U.S. person, which is not the Major Institutional Investor.
139 Edelweiss Securities Limited Oil, Gas and Services
In reliance on the exemption from registration provided by Rule 15a-6 of the Exchange Act and interpretations thereof by the SEC in order to conduct certain business with Major Institutional Investors, Edelweiss Securities Limited has entered into an agreement with a U.S. registered broker-dealer, Edelweiss Financial Services Inc. ("EFSI"). Transactions in securities discussed in this research report should be effected through Edelweiss Financial Services Inc.
Disclaimer for U.K. Persons The contents of this research report have not been approved by an authorised person within the meaning of the Financial Services and Markets Act 2000 ("FSMA").
In the United Kingdom, this research report is being distributed only to and is directed only at (a) persons who have professional experience in matters relating to investments falling within Article 19(5) of the FSMA (Financial Promotion) Order 2005 (the “Order”); (b) persons falling within Article 49(2)(a) to (d) of the Order (including high net worth companies and unincorporated associations); and (c) any other persons to whom it may otherwise lawfully be communicated (all such persons together being referred to as “relevant persons”).
This research report must not be acted on or relied on by persons who are not relevant persons. Any investment or investment activity to which this research report relates is available only to relevant persons and will be engaged in only with relevant persons. Any person who is not a relevant person should not act or rely on this research report or any of its contents. This research report must not be distributed, published, reproduced or disclosed (in whole or in part) by recipients to any other person.
Disclaimer for Canadian Persons This research report is a product of Edelweiss Securities Limited ("ESL"), which is the employer of the research analysts who have prepared the research report. The research analysts preparing the research report are resident outside the Canada and are not associated persons of any Canadian registered adviser and/or dealer and, therefore, the analysts are not subject to supervision by a Canadian registered adviser and/or dealer, and are not required to satisfy the regulatory licensing requirements of the Ontario Securities Commission, other Canadian provincial securities regulators, the Investment Industry Regulatory Organization of Canada and are not required to otherwise comply with Canadian rules or regulations regarding, among other things, the research analysts' business or relationship with a subject company or trading of securities by a research analyst.
This report is intended for distribution by ESL only to "Permitted Clients" (as defined in National Instrument 31-103 ("NI 31-103")) who are resident in the Province of Ontario, Canada (an "Ontario Permitted Client"). If the recipient of this report is not an Ontario Permitted Client, as specified above, then the recipient should not act upon this report and should return the report to the sender. Further, this report may not be copied, duplicated and/or transmitted onward to any Canadian person.
ESL is relying on an exemption from the adviser and/or dealer registration requirements under NI 31-103 available to certain international advisers and/or dealers. Please be advised that (i) ESL is not registered in the Province of Ontario to trade in securities nor is it registered in the Province of Ontario to provide advice with respect to securities; (ii) ESL's head office or principal place of business is located in India; (iii) all or substantially all of ESL's assets may be situated outside of Canada; (iv) there may be difficulty enforcing legal rights against ESL because of the above; and (v) the name and address of the ESL's agent for service of process in the Province of Ontario is: Bamac Services Inc., 181 Bay Street, Suite 2100, Toronto, Ontario M5J 2T3 Canada.
Disclaimer for Singapore Persons In Singapore, this report is being distributed by Edelweiss Investment Advisors Private Limited ("EIAPL") (Co. Reg. No. 201016306H) which is a holder of a capital markets services license and an exempt financial adviser in Singapore and (ii) solely to persons who qualify as "institutional investors" or "accredited investors" as defined in section 4A(1) of the Securities and Futures Act, Chapter 289 of Singapore ("the SFA"). Pursuant to regulations 33, 34, 35 and 36 of the Financial Advisers Regulations ("FAR"), sections 25, 27 and 36 of the Financial Advisers Act, Chapter 110 of Singapore shall not apply to EIAPL when providing any financial advisory services to an accredited investor (as defined in regulation 36 of the FAR. Persons in Singapore should contact EIAPL in respect of any matter arising from, or in connection with this publication/communication. This report is not suitable for private investors. Copyright 2009 Edelweiss Research (Edelweiss Securities Ltd). All rights reserved
Access the entire repository of Edelweiss Research on www.edelresearch.com
140 Edelweiss Securities Limited Edelweiss Securities Limited, Edelweiss House, off C.S.T. Road, Kalina, Mumbai 400 098 Tel: +91 22 4009 4400. Email: [email protected]