After reporting weak earnings in the September quarter, oil and gas companies are expected to report strong sequential growth during the third quarter ended December 31, 2022. Oil companies' operating earnings are seen growing by 82% on a quarter-on-quarter (QoQ) basis to ₹66,100 crore and net profit jumping by 4 times to ₹31,200 crore, according to a report by ICICI Securities.

“We expect Q3FY23 earnings for the 12 oil & gas companies under our coverage to show strong sequential improvement, with operating earnings likely up by a massive 82% QoQ to ₹66,100 crore and net income up 4.1x QoQ to ₹31,200 crore,” the domestic brokerage said in a latest report.

As per the report, the bulk of the improvement is likely to be driven by sharp turnaround by the oil marketing companies (OMCs), which should see a sharp narrowing of marketing losses on retail fuels and steady gross refining margins (GRMs) during the quarter under review.

The brokerage in its report said that city gas distribution (CGD) companies are expected to see the impact of higher gas costs on earnings, but aggressive pass-through of the same implies the damage to operating earnings would be relatively mild. For upstream companies, net realisations (net of windfall tax) are expected to remain steady at $73.5-74.1 per barrel, while gas utilities’ earnings will likely continue to be impacted by weak demand and lower trading margins (for GAIL), it said.

RIL’s PAT to grow 6% QoQ

Energy heavyweight Reliance Industries (RIL) is projected to see a strong recovery on sequential basis with stronger OTC+Jio+retail supporting a 5% QoQ jump in consolidated EBITDA. The consolidated profit after tax (PAT) is expected to grow 6% QoQ. Segment wise, Jio is expected to deliver a 2% QoQ rise in EBITDA while retail too is likely to have sustained the momentum, with an estimated 4% jump QoQ in segment EBITDA.

“RIL is likely to see a steady improvement across segments, with stronger base GRMs and relatively lower windfall tax to drive better OTC results. However, nearly 15% dip in integrated petrochemical spreads will likely offset the refining boost to an extent,” ICICI Securities said in the report.

OMCs to swing back to the black

The oil marketing companies (OMCs) - IOCL, BPCL, and HPCL - are likely to swing back to the black post the record loss seen in September quarter, thanks to volatility in international crude and product prices.

Post record high losses of ₹17.4 per liter on petrol and ₹27.7/ltr diesel for the week ended June 24, 2022, margins for petrol are estimated at a positive ₹10/ltr for Q3 while diesel losses too have likely narrowed to ₹6.5/ltr for the same quarter.

Adding to it, GRMs of $10.5-12.4/bbl (net of windfall tax and estimated inventory loss) will also boost operating earnings.

ONGC, OIL to see steady growth

ONGC, the country’s largest natural gas company, and Oil India Ltd (OIL) are seen posting steady earnings growth on sequential basis, driven by strong realisations on gas and cut in windfall taxes.

“Government has ensured the windfall tax rate for crude is kept at a level that ensures a steady range of $72-76/bbl net crude realisation for ONGC and OIL. Coupled with very strong realisations on gas, we see earnings remaining steady QoQ, with not much change in production levels, and sequentially lower other income offsetting the stronger price realizations,” the agency said in its report.

Gas utilities to see another weak quarter

Gas utilities companies such as GAIL India, Petronet LNG (PLNG), and Gujarat State Petroleum Corporation (GSPL) are likely to report weak results in December quarter as weak gas demand and supply shortages caused by geopolitical issues (Gazprom force majeure) may impact earnings. The high spot LNG prices constraining Dahej third party regas offtake may also weigh on earnings. Overall, all these 3 utility companies together are expected to post a 4% QoQ increase in EBITDA and a 17% QoQ decline in PAT.

Gas costs to impact CGDs

During the October-December quarter, city gas distribution (CGDs) companies saw record high domestic gas prices of $8.6/mmbtu (GCV, implying a delivered price of $9.7/mmbtu) and spot LNG prices still above $31.6/mmbtu (albeit down 32% QoQ). The higher volumes are also likely to cause a shortfall in domestic gas supply to the priority segments.

While IGL, MGL, and GGL managed to pass on the costs to varying degrees in Q3, their combined EBITDA are likely to be down 15% QoQ. 

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