ONGC, OIL to outperform Oil & Gas space: Sharekhan - Myiris.com

Mixed results `Poor show for upstream PSU players; strong earnings growth for private upstream players: The upstream oil and gas companies have posted mixed results in Q1FY2011 with the upstream public sector unit (PSU) companies logging in a decline in their net income whereas the private companies registering a strong growth in their earnings. PSU oil and gas upstream companies such as Oil and Natural Gas Corporation (ONGC) and Oil India (OIL) saw their quarterly net income fall by 24-32% on year-on-year (y-o-y) basis on account of a higher subsidy burden during the quarter while the earnings of private players like Reliance Industries (RIL) and Cairn India (CIL) were strongly up by 32-35% on y-o-y basis on the back of a strong volume growth.

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Q2FY2011 earnings outlook `Upstream PSUs to benefit from lower subsidy: The Q2FY2011 earnings outlook for PSU upstream companies is however bright and we expect their net income to improve in the coming quarter on the back of: 1) A lower subsidy burden, which will improve the net crude realisation for ONGC by USD13/bbl and for OIL by USD11/bbl on sequential basis; and 2) An improved earnings outlook from gas business as the full impact of a 133% hike in administered gas prices becomes visible from Q2FY2011 onwards.

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Delay in KG D-6 gas production ramp-up a negative: RIL reported a net income of Rs4,851 crore, up 32.3% y-o-y basis, in Q1FY2011, which is 3.3% higher than our estimate. Though the net income was higher than our expectation, the likely delay by 6-12 months in the ramp-up of Krishna Godavari (KG) D-6 gas production to 80mmscmd from its earlier guidance of Q4FY2011 is a negative development. Hence, with the KG D-6 gas production remaining constant at 60mmcmd for the next three quarters and with a marginal decline in the petrochemical margin, we do not expect any kind of positive surprise in the earnings of RIL at least in FY2011.

ONGC, OIL to outperform Oil & Gas space: Sharekhan - Myiris.com