The oil and gas sector is going through a purple patch. Aggregate profit of hydrocarbon companies that form part of the Nifty 500 Index was up 34 per cent Y-o-Y in 2016-17. This was thanks to multiple factors — robust margins and pricing reforms that boosted refiners, cheap gas that aided gas utilities, and uptick in oil prices that helped explorers. In the recent June quarter though, the aggregate profit of the group dipped 23 per cent Y-o-Y. But this was primarily due to inventory losses incurred by the PSU oil refiners from the fall in oil prices in the quarter — a cyclical factor.

Winners and losers The best performers over the past year or so include Reliance Industries, the PSU oil marketing companies Indian Oil, HPCL and BPCL, and the gas utility companies — GAIL (India), Petronet LNG, Indraprastha Gas and Mahanagar Gas. Reliance Industries benefited from strong gross refining margins ($11-$11.9 a barrel) and volume growth in its refining business. The company’s petrochemicals segment also did well, with expansion in volumes and margins. These offset continuing weakness in the exploration segment and helped RIL grow its profit (before exceptional items) by about 19 per cent Y-o-Y in 2016-17 and 13 per cent in the June 2017 quarter.

Indian Oil, HPCL and BPCL benefited from higher refining margins and continuing gains from pricing reforms in the form of lower under-recoveries and interest costs. BPCL’s profit rose 15 per cent last year, while Indian Oil (65 per cent) and HPCL (76 per cent) did much better. Inventory gains helped in 2016-17, but inventory losses pulled down first quarter profits 45-72 per cent Y-o-Y.

Gas transmitter GAIL (India) saw its profit before exceptional items increase 71 per cent in 2016-17 and 21 per cent Y-o-Y in the June 2017 quarter — this good show was driven primarily by a turnaround in the company’s petrochemical business and improved performance in its mainstay gas transmission business. Gas importer and regasifier Petronet LNG’s profit nearly doubled in 2016-17 and rose about 16 per cent in the June quarter. This was thanks to the company’s expanded capacity at the Dahej terminal and high demand due to lower gas costs and domestic production shortages.

Delhi-based city gas distributor Indraprastha Gas and its Mumbai-based peer Mahanagar Gas also did well, thanks to low raw material (natural gas) costs. Good volume growth due to network expansion and price advantages over competing fuels also helped. This resulted in the profit of Indraprastha Gas rising 32 per cent in 2016-17 and 9 per cent in the June 2017 quarter, while that of Mahanagar Gas grew 26 per cent last year and 34 per cent in the June quarter.

In 2016-17, hydrocarbon explorers ONGC and Oil India benefited from the rise in oil price from its lows in early 2016, which offset the negative impact of low gas prices. ONGC’s profit was up nearly 64 per cent last year. Oil India too would have put up a good show but for a heavy one-time royalty settlement expense, which pulled down its profit 23 per cent. Low gas prices and a jump in depletion costs, though, took a toll on the June 2017 quarter profit — ONGC saw an 8 per cent decline while Oil India’s profit fell 9 per cent Y-o-Y.

What lies ahead Refiners should continue doing well. Expansion and upgrade initiatives should help Reliance Industries and the PSU oil refiners. Gas utilities are in a sweet spot. GAIL (India) should gain from the progress on its Kerala pipeline and upsides in its petrochemical business. Expansion plans and the growing demand for gas should hold Petronet LNG, Indraprastha Gas and Mahanagar Gas in good stead. Oil explorers, however, could feel the pressure from range-bound oil prices ($50-$60 a barrel), low domestic gas prices and challenges in increasing output.

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