Research report::Indian Oil & Gas Industry

December 4, 2014

.
OVERVIEW
India is the fourth-largest consumer of oil and petroleum products in the world. The
Indian Oil and Gas (O&G) account for ~37% of total energy consumption. Oil
consumption is estimated to reach 4 million barrels per day (mbpd) by FY16,
expanding at a compound annual growth rate (CAGR) of 3.2% during FY08-16F.
India’s energy demand is projected to touch 1,464 million tonnes of oil equivalent
(mtoe) by 2035 from 559 mtoe in 2011. Furthermore, the country’s share in global
primary energy consumption is anticipated to double by 2035. Also, backed by new
oil fields, domestic oil output is anticipated to grow to 1 mbpd by FY16. Domestic
production accounts for more than three quarters of the country's total gas
consumption. Total gas production was 35.4 billion cubic metres (BCM) in FY14. Total
crude oil production in FY14 stood at 37.9 million metric tonnes (MMT). India has a
network of 9,785 km of crude pipeline with a capacity of 139.25 million metric
tonnes per annum (MMTPA). The Government of India has allowed 100% foreign
direct investment (FDI) in E&P projects/companies and 49% in refining under the
automatic route. It has also introduced policies like New Exploration Licensing Policy
(NELP) and Coal Bed Methane (CBM) Policy to promote investments in the industry.

Major segments in Oil & Gas (O&G) sector

Exploration & production

Upstream segment
Major players: ONGC, OIL, Cairn India

Storage & transportation

O&G Industry Midstream segment Major players: IOCL, GAIL

Refining, processing &

Downstream segment Marketing
Major players: IOCL, GAIL, RIL

Opportunities in O&G Sector: Key Concerns for the sector:

 Locating new fields for exploration: 78% of the  Access to reserves: political constraints and
country’s sedimentary area is yet to be explored. competition for proven reserves.
 Expansion in the transmission network of gas pipelines.  Uncertain energy policy.
 LNG imports have increased significantly; this provides  Price volatility.
an opportunity to boost production capacity.
 Health, safety and environmental risks.
 Constructing new refineries considering advantages
 Competition from new technologies.
such as low operation costs, lesser freight charges and
favourable policies.
 Research report::Indian Oil & Gas Industry

December 4, 2014

O&G sector – Demand-supply gap is widening Domestic demand-supply gap in 2013-14

The global oil demand in 2013 rose by 1.3 mbpd to the level of 91.4 mbpd, this 250
Units: *MMT, **BCM
was matched by oil supply of 91.5 mbpd, rising by 0.6 mbpd from 2012 levels.
India was the fourth largest consumer of crude oil and petroleum products in the 200
world in 2013, after the United States, China and Japan and is expected to
150 Production
overtake Japan to become the world’s third largest oil consumer behind the US
and China by 2025, according to the US Energy Information Administration (EIA). 100 Consumption
With ~80% of oil import, India was also the fourth largest net importer of crude oil
and petroleum products. The gap between India’s oil demand and supply is 50
widening, as India's total consumption of crude oil ~6 times of total domestic
0
crude oil production in 2013-14. Domestic crude oil production came at 37.79 Crude oil* Natural gas**
mmt, against a consumption of 222.5 mmt. High degree of dependency on
imported crude oil is expected to double India’s demand for oil to ~8.2 mbpd by Source: Indian Ministry of Petroleum & Natural gas
2040, according to the US EIA. India's natural gas consumption consistently exceeded domestic gas production, leading to increased
dependence on LNG imports to meet the shortfall. India's total consumption of natural gas rose from 31.48 bcm in 2007-08 to 34.64
bcm in 2013-14. The domestic production over the same period was 32.42 bcm in 2007-08 and 35.41 bcm in 2013-14. Power,
Fertilizer, LPG, Steel and Petrochemicals have been the key consumption drivers of natural gas.

Key growth drivers

 India is the world’s fourth-largest energy consumer

 Oil consumption is expected to rise 42.5 per cent during 2010–20
Robust domestic market dynamics  Several industries are increasing the usage of natural gas in operations; this has boosted
natural gas demand in India

 The nation has large coal, crude oil and natural gas reserves
 Oil reserves amounted to 5.7 billion barrels in 2013
Abundant reserves potential &  Proved reserves of natural gas stood at 1.4 tcm in 2013
discoveries

 The government has allowed 100% FDI in E&P projects/companies; and 49% in refining under
the automatic route from the earlier approval route
Favorable policies  It has also introduced policies to promote investments in the industry such as New Exploration
Licensing Policy (NELP) and Coal Bed Methane (CBM) Policy.

 Investments worth USD75 billion is expected across the oil & gas value chain under the 12th
Plan (2012–17)
Huge investment  FDI worth USD 5.5 billion has been invested in India’s petroleum and natural gas sector during
April 2000–March 2014

Huge reserves potential to provide more oil & gas discoveries

India held nearly 762.74 mmt of proved recoverable oil reserves and 47 trillion cubic feet (tcf) of proven natural reserves at the
beginning of 2014. About 49.7% of reserves are onshore resources, while 50.3% are offshore. Domestic production has not kept
pace with demand in recent years, leading to exploration of deepwater and marginal fields and investment in improving recovery
rates of existing fields. In addition, Indian national oil companies are purchasing more upstream stakes in overseas oil fields to
increase supply security from imported crude oil. Most reserves are found in the western part of India, particularly the Western
offshore area near Gujarat and Rajasthan. The Assam-Arakan basin in the northeastern part of the country is also an important oil-
producing region and contains more than 23% of the country’s reserves and 12% of the production. We expect that strong oil &
gas reserve base with impressive exploration track record to diversify the country’s oil & gas production.
 Research report::Indian Oil & Gas Industry

December 4, 2014

Crude oil production remained stagnant in 2013-14

In order to meet the ever-growing demand for petroleum products, the government has consistently endeavored to enhance
exploration and exploitation of petroleum resources, along with developing a concrete and structured distribution and marketing
system. Despite this, crude oil production remained stagnant at around 37.8 mmt in FY13-14 as against 37.9 mmt in FY12-13,
showing a marginal decrease of about 0.20%. Crude oil production by National Oil Companies that account for over 70% of
production, continued to fall during the year, while production by private companies rose by 3.7%. The majority of crude oil
production is from ageing fields except new fields viz., Rajasthan and KG deep-water blocks. Production of Crude oil was affected
due to environmental factors, bandhs/blockades in Assam, power disturbances in Gujarat, delay in production from wells in Andhra
Pradesh, and lesser production from development/side-track wells in Mumbai, poor influx, under performance of producing wells
and less base potential of major fields that affected production of Ahmadabad & Ankleshwar.

Crude oil & natural gas production trend

Crude oil production % Growth in crude oil Natural gas Production % Growth in natural gas
Year
(mmt) production (bcm) production
2007-08 34.118 0.38 32.417 2.11

2008-09 33.508 -1.79 32.845 1.32

2009-10 33.690 0.54 47.496 44.61

2010-11 37.684 11.85 52.219 9.94

2011-12 38.090 1.08 47.559 -8.92

2012-13 37.862 -0.60 40.679 -14.47

2013-14 37.788 -0.19 35.407 -12.96

Source: Indian Ministry of Petroleum & Natural gas
Decline in production from the KG basin caused lower natural gas production in 2013-14
During FY14, domestic natural gas production fell by 13% YoY to 35.4 bcm, largely due to decline in production from the KG Basin,
where a total of 9 wells in D-1 & D-3 fields and 3 wells in MA field have ceased to flow due to water /sand ingress in KG-SWN-98/3
field and closure of MA wells due to leak observed in the MA riser. Further, consequential effect of bandhs and blockades in Assam
and underperformance of development of new wells also affected the natural gas production. Along with this, price sensitive market
& insufficient infrastructure constrained LNG imports, which remained almost stagnant at 10.85 mmt in 2013-14.

Consumption of petroleum products Petro-products production & consumption trend

With a total petroleum product consumption of 158.20 mmt in 2013-14, the

250.0
petroleum industry registered a volume growth of just 0.7%, the lowest it has
grown for the past 12 years. Of the three sensitive petroleum products 200.0
(products with price controls), only LPG registered a positive growth in 150.0
mmt

220.8
217.7
203.2
194.8

consumption (+4.7%) while superior kerosene oil (SKO) consumption 100.0

126.72

decreased by 4.5% and high speed diesel (HSD) plummeted by a percent over
141.0

148.1

157.1

158.2

93.8

50.0
last year’s volumes. It is the first time in 10 years that demand for the country’s
0.0
most consumed fuel has dropped. The drop could well be the combined effect
of the periodic price hikes implemented by the government and the overall drop
in activity of the industrial and commercial sector where its usage is the
maximum, due to slowdown in economic growth. However, Motor Spirit or Production of petro products
petrol, a major decontrolled product and the primary fuel in the private Consumption of petro products
automobile sector, managed a healthy increment of 8.8% in its total volumes
Source: Indian Ministry of Petroleum & Natural gas
over FY13.
 Research report::Indian Oil & Gas Industry

December 4, 2014

Refinery output in India improved in FY14; outlook remains positive

During the fiscal year ended March 2014, the country’s crude oil refinery output stood at 222,497 trillion metric tonnes (tmt) as
against 219,212 tmt in FY13, reflecting an increase by 1.5% YoY. The output of the public refineries declined marginally to 119,547
tmt in FY14 from 120,303 tmt in FY13; while growth in output from the private refineries stood flat at 88,229 tmt in FY14 as against
88,273 in FY13. The refinery output from the joint ventures, on the other hand, posted a 38.4% rise in output at 14,721 tmt
compared to 10,636 tmt in FY13. The recent data on refinery output for October 2014, showcased similar trend, with a 4.2% growth
in India’s crude refinery output to 19.115 million tonnes (mt), snapping a declining streak from the last three sequential months.
While the output from the public sector refineries grew by 1.9% to 9.915 mt in October, the same from the private refineries posted a
growth of 1.4% to 7.723 mt. Besides, public-private joint venture refiner’s output surged 48% to 1.478 mt in October 2014 over
October 2013.
It was noted that the petroleum refining capacities remained flat for most of the public, private and joint ventures with total capacity
of 215.066 mmtpa in FY14. While petroleum refining capacity of the public refineries stood at 120.066 mmtpa for FY14 with
capacities of major refineries like IOCL Refineries, BPCL refineries, HPCL Refineries and CPCL refineries standing at 54.200 mmtpa,
21.500 mmtpa, 14.800 mmtpa and 11.500 mmtpa, respectively; while, the refining capacity of private refineries stood at 80.000
mmtpa with capacity of RPL at 60.000 mmtpa in FY14. Besides, refining capacity of JVs stood at 15.000 mmtpa during the period.
Given the 104.65% capacity utilization in October 2014 as against 101.35% in H1FY15 (compared to 100.4% in October 2013 and
103.1% in H1FY14), we believe the output will see a significant improvement in the coming quarters. Further, given the public as well
as private players investments towards exploration and drilling activities, we remain positive for a further improvement in the refinery
output.

Private refiners earns higher GRMs than the public players

Gross refining Margins (GRMs), a key industry measure of profitability, at several refineries of Indian state-run firms are lower than
those of private companies. The lower GRMs of government run companies are largely on account of comparatively higher operating
costs they incur. Moreover, it is widely believed that while the private players calculate their GRMs on actual price, the public sector
players like IOCL base their GRMs on price at which the crude has been sourced.
While the GRM of IOCL rose to US$ 4.24/bbl in FY14 as against US$ 3.16/bbl in FY13, the GRM of BPCL declined marginally to US$
4.33/bbl in FY14 from the previous year’s US$ 4.97/bbl. For HPCL and MRPL, the GRM came in at US$ 3.43/bbl and US$ 2.67/bbl
in FY14 from US$ 2.08/bbl and US$ 2.45/bbl in the corresponding period a year ago. It was noted that CPCL recorded a much higher
growth in GRMs at US$ 4.06/bbl as against US$ 0.99/bbl in FY13.On the other hand, the private players like Reliance Industries
witnessed a decline in its GRM in FY14 that stood at US$8.10/bbl against US$9.20/bbl in FY13, while, that of Essar Oil GRM almost
remained flat at US$7.98/bbl in FY14 as against US$7.96/bbl in FY13.
Further, during the second quarter ended September 2014, the state-run firm, IOCL’s GRM continued to be low, hovering around
US$2/bbl). The company is working on measures including focusing on value added products and integration with petrochemical
units in order to increase their GRMs. During the same period, Reliance Industries Ltd (RIL), the private player, reported a GRM of
US$ 8.3/bbl. Essar Oil, on the other hand, had reported a GRM of US$ 7.03/bbl in its second quarter numbers.
Average GRMs of Refineries (US$/bbl)

Company FY12 FY13 FY14 H1FY14 H1FY15

IOCL 3.63 3.16 4.24 5.19 0.09
BPCL 3.16 4.97 4.33 4.38 2.36
HPCL 2.39 2.08 3.43 3.27 2.09
CPCL 4.16 0.99 4.06 5.76 2.11
MRPL 5.60 2.45 2.67 3.98 -1.79
NRL 12.45 10.52 12.09 5.48 9.79
BORL - 7.00 7.70 9.20 5.70
RIL 8.60 9.20 8.10 8.00 8.50
Essar 4.23 7.96 7.98 6.97 8.05
 Research report::Indian Oil & Gas Industry

December 4, 2014

Government deregulates diesel prices – a big positive for oil companies

In October 2014, the newly-formed NDA led government announced the fuel reform in which they have de-regulated the diesel price
in a move to free the economy from the clutches of fuel subsidy. The Finance Minister Arun Jaitley announced that the diesel price
stood de-regulated to allow it to move as per market conditions, just like petrol. In April 2002, the NDA government led by Atal Bihari
Vajpayee deregulated the Petrol and Diesel prices. But administered pricing regime made a back-door entry in 2004 with UPA
Petroleum Minister Mani Shankar Aiyar pushing for control on diesel, LPG and kerosene prices.
The new reform now announced by the government should provide relief to the OMCs in long run as the initiative would ease down
the burden of under-recoveries to a significant extent. The recent diesel price hike and eventual deregulation is expected to result in
52% reduction in gross under-recoveries by FY16 versus FY14 to `647 billion.
Deregulation allows companies to price their fuel products on the basis of market prices. This leaves them with little scope for losses.
Though, the government used to pay the companies a sizable remuneration for their loss, but these often get delayed. As a result,
companies are in severe financial stress. Now, the de-regulation will get rid of all these financial issues. As companies sell fuel at
market-determined rates, their cash flows could improve, thus reducing the overall stress.

Gas price hike - key positive development for gas transmission and marketing companies; lack of subsidy burden to boost
profitability
The government has recently raised the natural gas prices by 33% to US$ 5.61 (mmBtu) from US$ $4.2 mmBtu. The new formula
was effective from November 1, 2014 and rates will be revised every six months with the next revision being on April 1, 2015. An
increase in gas prices by the government is expected to increase the PAT of the upstream companies and will also help the oil
companies to ease the negative impact of under-recoveries on them. As per a report by Crisil, the combined effect of lower under-
recoveries (revenue loss for selling gas under its production cost) and the gas price hike is expected to lift the PAT of the upstream
companies by ~`215-230 billion in FY15. However, as per our expectations, the government’s move to raise the gas prices will not
only impact the exploration companies positively, but will also have a positive impact on the gas transmission and marketing
companies, with GAIL India one the of the key beneficiaries, as it would not have to pay for under-recoveries.
On the backdrop of the announcement, GAIL India is all set to raise the domestic price of liquefied natural gas (LNG) by 10 cents per
million British thermal unit (mmBtu), in a move to force the local consumers such as power projects and fertilizer plants to finalize
their purchase plans to avail the benefits of cheaper gas prices. Moreover, we believe that the implementation of gas price hike
would also be positive for RIL as Cabinet Committee on Economic Affairs (CCEA) note clearly stated that deep water discoveries post
this decision would get premium on gas price and most of the RIL fields (MJ1, R-series) are in deepwater. Meanwhile, Mahanagar
Gas Ltd (MGL), one of the leading natural gas distribution companies and a joint venture (JV) between GAIL and the UK based BG
group, hiked CNG prices by `4.50 per kg to `43.45. Similarly, it also raised tariff for piped natural gas (PNG) supplied to households
for cooking purposes by `2.49 to `26.58 per cubic meters, thereby raising the company’s prospects for higher profitability.
We believe, the move will help the O&G companies to lower down their subsidy burden and will also push their marketing margins,
which will ultimately boost their profitability.

Favorable government policy to benefit the overall O&G sector

In order to cushion India's vulnerability on dependence of crude oil imports as India imports around 80% of the crude oil
requirement, the government remains focus towards ramping up output of oil and gas from domestic fields. The National Exploration
Licensing Policy (NELP), 1999 provides an international class fiscal and contract framework for Exploration and Production of
Hydrocarbons. Licenses for exploration are awarded through a competitive bidding system – nine rounds of bidding were completed
as of 2011. In the first seven rounds of NELP spanning 2000-2009, Production Sharing Contracts (PSCs) for 203 exploration blocks
have been signed. Under NELP, 70 oil and gas discoveries have been made by private/joint venture (JV) companies in 20 blocks.
With a view to accelerate further the pace of exploration, the eighth round of NELP was launched in April 2009. In the eighth round of
NELP, 70 exploration blocks comprising of 24 deepwater blocks, 28 shallow water blocks and 18 on land blocks was offered. In the
ninth round of NELP, since 1999, 131 discoveries have been reported in 41 blocks, 86 (2/3rd) of which are gas discoveries that will
require higher gas prices and greater scale of operations to be viable. Further, the government is lined up for the tenth round of
NELP, in which 52 Blocks are proposed to be offered. However, the offer is de-risked to the extent of all necessary statutory
clearances having been pre-obtained.
 Research report::Indian Oil & Gas Industry

December 4, 2014

Besides, the policy on Shale Gas & Oil, 2013 allows companies to apply for shale gas and oil rights in their petroleum exploration
licenses and petroleum mining leases. India has technically recoverable shale gas resources of nearly 96 Trillion cubic feet.
Declining crude oil prices augur well for O&G industry
In H12014-15, India’s average crude oil import price (Indian basket) plunged to US$ 101.71/bbl from US$ 105.52/bbl, while, the
international brent crude prices have dropped 40% since June’14 to US$74 a barrel recently, causing anxiety within the Organization
of the Petroleum Exporting Countries (OPEC) and giving some relief to India and China, the major crude oil importers. The fall in
prices is largely due to subdued demand by consumers and oversupply by some OPEC producers. An added reason is the increase in
the US production from shale. India imports more than two-thirds of its requirement, which constitutes 37% of total imports. A one-
dollar fall in the price of oil saves the country ~ `40 billion. The benefits of declining crude oil prices on Indian oil PSUs are already
visible. Together with continuous monthly increase in retail diesel prices (since January 2013), the under-recovery on the sale of
diesel has been eliminated in September 2014. This is expected to provide huge relief to the sector as losses on diesel accounted
for about 45% of the total under-recovery burden in 2013-14.
India’s average crude oil import price trend

150
US$/bbl

100
111.89 107.97 105.52 101.71
50 85.09
69.76
0
2009-10 2010-11 2011-12 2012-13 2013-14 H12014-15

On earnings front, the profitability of downstream PSUs is likely to increase by ~`35-40 billion YoY in 2014-15 and by other `7-10
billion in 2015-16 because their interest costs will decrease with the decline in their working capital requirements, and they would
not have to any under-recovery burden. While, we expect that upstream O&G companies, which typically share 40-50% of the total
under-recovery burden on petroleum products, is expected to see a sharper improvement of ~`105-120 billion YoY in net profit in
2014-15 and a further improvement of ~`70-75 billion in 2015-16. This is because the impact of the reduced burden of under-
recoveries on upstream companies will more than offset the impact of decline in realisations due to lower crude oil prices. The net
realisations of upstream companies are expected to increase by US$20-25 per barrel over the next two years.
Under-recoveries to deflate further on falling crude oil prices (`billion)

Apr-Jun’13 FY14 Apr-Jun’14

Government 257.72 707.72 170.00
Upstream 320.34 670.21 319.26
OMCs 31.01 20.76 21.84
Total 609.07 1,398.69 511.10

The gross under-recoveries (GURs) of OMCs decreased by 13% YoY to `1,399 billion in FY14 from `1,610 billion in FY13 primarily
driven by 32% fall in under-recoveries on diesel to `628 billion in FY14 from `921 billion in FY13 following monthly increase in diesel
prices by around ~`0.5 /litre. The share of upstream companies in the under-recoveries increased to 48% in FY14 from 37% in FY13
as the GoI reduced its share to 51% in FY14 from 62% in FY13. In terms of absolute quantum, the under-recoveries borne by the
GoI, decreased to `708 billion in FY14 from `1,000 billion in FY13, while the net under-recoveries for OMCs increased to `21 billion
in FY14 from `10 billion in FY13.
Considering the strategic imperative of lowering the subsidy burden for improving the fiscal position of the GoI, we expects the
ongoing monthly retail diesel price hikes to continue till the retail diesel prices are market-linked. Although the diesel under-
recoveries are expected to decrease by around 60% YoY to `260 billion in FY15, while, the under-recoveries related to LPG and SKO
will keep the gross under-recoveries (GURs) at high level if the retail prices of these products are not increased. With elimination of
under recovery on diesel, we expect GURs ~ to halve to `600-700 billion in 2015-16, assuming Indian Basket crude oil price of US$
99 /bbl.
 Research report::Indian Oil & Gas Industry

December 4, 2014

Higher investments in O&G sector provide long term positive outlook

The O&G Industry in India is one of the core sectors of India, constitutes over 15% of the GDP. The industry serves as the backbone
for transportation and hence affects the performance of many other industries such as infrastructure, cement, construction etc.
According to data released by the Department of Industrial Policy and Promotion (DIPP), the Indian petroleum and natural gas sector
attracted foreign direct investment (FDI) worth US$ 5.4 billion in FY13 and of US$ 5.5 billion in FY14. FDI inflows in India totalled
US$ 193.4 billion in FY13 and US$ 217.7 billion in FY14.
FDI inflows into petroleum and natural gas (US$ billion) FDI inflows in India (US$ billion)

6 5.4 5.5 250

217.7
5 193.4
200
170.4
4
3.2 3.3
150 129.8
3 2.7 115.7
100
2

1 50

0 0
FY10 FY11 FY12 FY13 FY14 FY10 FY11 FY12 FY13 FY14

Following are some of the major investments and developments planned in the oil and gas sector:
Reliance Industries Ltd (RIL) plans to invest US$ 2 billion in its three shale assets in the US. RIL has already invested US$ 7.3
billion since 2010 towards development of shale gas and oil in the US market. The company also, along with its partner
British Petroleum (BP), plans to invest about `8 bn (US$ 130.35 million) for exploratory drilling in an offshore block in the Bay
of Bengal. RIL is the operator of the offshore block CY-DWN-2001/2, also known as CY-III-D5, with 70% equity, with BP holding
the remaining stake. BP's contribution to the investment would be `2.40 bn (US$ 39.11 million).
ONGC Videsh Ltd (OVL) has signed Production Sharing Contracts (PSCs) for two blocks in Myanmar. The contracts were signed
between OVL, Myanmar Oil & Gas Enterprises Ltd (MOGE), National Oil Company of Myanmar, and Machine & Solutions Co
Ltd (M&S). ONGC will also invest over `57 bn (US$ 928.73 million) to push up production by 6.9 MT of crude oil and 5 billion
cubic metres (bcm) of gas by 2030 from its Mumbai High (North) oil and gas field.
Steel-to-BPO conglomerate, Essar is in talks with Germany's BASF, the biggest chemicals company in the world, for a
petrochemicals joint venture (JV).
Indian Oil Corporation Ltd (IOCL) through its wholly owned affiliate IndOil Montney Ltd, Canada, has signed transaction
agreements with Progress Energy Canada Ltd and PETRONAS Carigali Canada BV for acquiring a 10% interest in Progress
Energy Canada’s LNG-destined natural gas reserves in northeast British Columbia and the proposed Pacific NorthWest LNG
Ltd (PNW LNG) export facility in Canada’s West Coast.
GAIL (India) Ltd has entered into an agreement with Japan-based Chubu Electric Power Co for collaboration in the area of joint
LNG procurement. Additionally, the two companies will look to work together on shipping optimisation.
India and Azerbaijan have proposed to form a joint working group in the field of hydrocarbon. The two countries have agreed
to explore opportunities for partnership in renewable energy sector, energy efficiency and numerous upcoming projects in
petro-chemicals, oil and gas, pipelines, etc., in India, Azerbaijan or other countries, in collaboration or JV.
 Research report::Indian Oil & Gas Industry

December 4, 2014

Porters five force Analysis of Oil & Gas Industry

Threats to
new
entrants
(LOW)

Bargaining Competitive Bargaining

power of power of
suppliers Rivalry Customers
(LOW)
(MEDIUM) (LOW)

Threat of
Substitutes
(LOW)

To determine industry attractiveness and long-run industry profitability of the Indian O&G Industry, we chose to apply the
Porter’s five forces in our analysis. Porter’s five forces are: (1) Barriers to Entry and exit, (2) Threat of substitutes, (3) Buyer
bargaining power, (4) supplier bargaining power, and (5) Industry Competition.

 Barriers to Entry and exit

Given the capital intensive nature of the industry and economies of scale, threat of new entrants continues to be low in the
O&G industry. Having ample cash is another barrier - a company had better have deep pockets to take on the existing
companies.

 Threat of substitutes
Substitutes for the O&G industry in general include alternative fuels such as coal, gas, solar power, wind power,
hydroelectricity, nuclear energy etc. Threat from these alternate sources is quite low as they are less developed. However,
pressure from these alternative sources might rise in future.

 Buyer bargaining power

Customers have low/non-existent bargaining power as they have no say in price determination.

 Supplier bargaining power

While there are plenty of oil companies in the world, much of the O&G business is dominated by a small handful of powerful
companies. The large amounts of capital investment tend to weed out a lot of the suppliers of rigs, pipeline, refining, etc.
There isn't a lot of cut-throat competition between them, but they do have significant power over smaller drilling and support
companies. For big players, the power remains low. So, all in all, we can say, the power is medium.

 Industry Competition
 Competitive rivalry is low in the industry as just one-two players operate in Upstream, Midstream and
Downstream segments.
 Although a few private operators have entered the industry in the last couple of years, they do not pose any
major threat as of now.
 Research report::Indian Oil & Gas Industry

December 4, 2014

Financial performance of Indian Oil & Gas companies

Company Year EBITDA

Sales (`bn) NPM (%) ROA (%) ROE (%) EPS (`) BVPS (`)
ended Margin (%)
Mar’13 1,624.03 26.34 14.42 9.63 15.87 28.31 178.28
ONCG
Mar’14 1,744.77 23.72 14.61 8.20 15.39 30.98 201.22
Mar’13 2,367.67 1.73 0.79 2.68 11.54 26.78 232.00
BPCL
Mar’14 2,579.75 0.12 1.47 4.78 20.13 54.08 268.66
Mar’13 2,161.54 0.83 0.23 0.13 3.75 14.80 394.49
HPCL
Mar’14 2,341.59 0.99 0.45 1.24 7.71 31.90 413.40
Mar’13 4,617.80 1.72 0.94 2.01 7.05 18.32 259.63
IOCL
Mar’14 4,883.45 2.20 1.44 2.16 10.43 29.18 279.71
Mar’13 99.68 37.94 31.29 15.25 18.66 59.75 320.21
OIL
Mar’14 97.16 29.07 25.98 9.76 14.36 48.94 340.72
Mar’13 3,970.62 5.49 5.15 6.53 11.47 71.11 619.93
RIL
Mar’14 4,344.60 5.43 5.07 6.12 11.32 76.52 675.85
Mar’13 510.94 14.65 8.56 11.70 15.19 34.48 227.00
GAIL India
Mar’14 619.18 12.93 7.73 10.89 13.78 35.27 255.87
Mar’13 314.67 5.26 3.63 10.50 25.82 15.32 59.33
Petronet LNG*
Mar’14 377.48 3.15 1.88 6.04 14.27 9.49 66.48
Mar’13 175.24 63.83 64.95 27.32 25.27 63.12 249.71
Cairn India
Mar’14 187.62 60.70 61.34 25.20 21.64 65.17 301.10

*Standalone
Outlook on domestic O&G sector
The outlook for Indian O&G industry looks stable for both public and private sector oil and gas companies. Huge demand-supply gap
offers an enormous opportunity for the O&G sector in India. In India, only seven basins are producing (out of 26) and exploration is
yet to be initiated in 11 basins. The auctions for oil and gas blocks under the tenth round of NELP is likely to held in near term,
which in turn would ramp up India’s domestic hydrocarbon exploration and production. This provides a huge opportunity for all
explorers, like ONGC, OIL, Cairn India to convert these remaining basins into a producible proposition. While for downstream
segment, the long-term prospects continues to be bright, based on the sizeable potential for petrochemicals and demand growth. By
2015-16, import dependency is projected to come down as new capacities come on line. India is one of the major growth centres of
petroleum demand and also a hub for downstream petroleum business. As per International Energy Agency (IEA), over the medium-
term (2020) India will continue to be a net exporter of refined petroleum products and over the long-term (2035) it will become the
largest source of global oil consumption and a net importer. Recent announcement made by the GoI on gas price hike and
deregulation of diesel price marks government’s move to reform the oil sector. Post diesel deregulation, we expect fall in under-
recoveries, which in turn would lead to lower borrowing levels and interest burden, thereby resulting in improvement in profitability
and liquidity position of the OMCs. Besides, the fall in under-recoveries could also reduce the subsidy burden of the GoI as the
government may retain large part of benefits of lower under-recoveries in order to meet its aggressive fiscal deficit reduction target
for FY15. However, the under-recoveries related to LPG and SKO will keep GURs at high level if the retail prices of these products
are not increased materially.
Following an outlook of subdued international refining margins and moderate import-duty differentials between petroleum products
and crude oil, GRMs of domestic refineries are also expected to remain weak over the medium term. Their profit metrics will
continue to be sensitive to the volatility in Indian Rupee (INR) against the US Dollar (USD) parity levels, inventory gains/losses
arising from volatility in crude prices and import duty protection levels. But considering the huge demand for oil & gas, favorable
government policy and regulation, increased investment, falling crude oil prices and under recoveries, we maintain positive outlook
for domestic O&G industry for 2015-16E.
 Research report::Indian Oil & Gas Industry

December 4, 2014

GAIL (India) Ltd.

Investment Rationale
Stock Data
 GAIL (India) witnessed a robust growth in its standalone net profit at Current Market Price (`) 470.4
`13,029.0 mn in Q2FY15, up by 42.3% YoY from the corresponding Target Price (`) 538
period of the previous year, revenue from operations grew marginally by Potential upside (%) 14.3
0.9% YoY to `140,631.8 mn, during the quarter. The increase in Reuters Code GAIL.NS
revenue was on account of rise in revenue from LPG and Liquid
Bloomberg Code GAIL:IN
hydrocarbon and petrochemical business by 64% and 13%, respectively.
Further, GAIL clocked a growth of 11.6% in H1FY15 in its standalone net
profit while posting a growth of 2.2% YoY in revenue from operations. Key Data
We remain positive for H2FY15 and FY15 as a whole on the back of
Market Cap (`bn ) 596.7
growth in profitability led by higher gas prices with effect from November
2014. We estimate ~18.3% and ~6.6% YoY growth in net profit in 52-Week Range (`) 552 -332
FY15E and FY16E, respectively, while the revenue is expected to grow 1-yr Avg. Daily Trading Value (`mn) 1.4
by ~21% and 20% YoY in FY15E and FY16E. Promoters (%) 56.1
FII Holding (%) 19.1
 The recent announcement by the government of India (GoI) for a price
DII Holding (%) 20.9
hike in natural gas prices has turn out to be a positive development for
GAIL as it will help reduce the subsidy burden on the company and the Public & Others Holding (%) 3.9
company will now be able to earn higher marketing margins, which
would subsequently boost the profitability. The GoI has revised the gas Fiscal Year Ended
prices to US$5.61 mn British thermal unit (mmBtu) from US$4.2 Y/E March* FY13 FY14
mmBtu with effect from November 01, 2014.
EBIT Margin (%) 13.7 11.8
 GAIL enjoys a dominant position in the natural gas transmission NPM (%) 8.6 7.7
business with a market share of 71% with its large pipeline network EPS (`) 34.5 35.3
covering 10,900 km. The dominant market share, along with regulated
returns on the capital employed, has resulted in healthy profitability and Book Value per share (`) 227.0 255.9
stable cash generation for GAIL. The RoCE for gas transmission/trading P/E (x) 13.6 13.3
division remained stable at around 28-32% during FY09-FY12. On the
P/BVPS (x) 2.1 1.8
back of ~21% expected revenue growth and a rise in profitability by
~18.3% in FY15E, we believe the company’s market share will increase EV/EBITDA 9.8 9.4
significantly in the coming time. ROCE (%) 14.9 13.4

Valuation ROE (%) 15.2 13.8

We expect the company to maintain the growth momentum due to dominant One Year Relative Price Performance
market position in gas transmission. While the company’s performance
remained mixed in Q2FY14 with a robust growth in profitability and muted 150
incline in revenues, we expect the company to resume growth in FY15 with
new supplies from the LNG terminals at Kochi, Dahej and incremental gas in 100
the KG basin from RIL and ONGC. Further, the company’s move to raise gas
prices, which was in line with the government’s announcement of a hike in 50
gas prices, is likely to generate improved marketing margins, thereby aiding
to the profitability. Further, cap on subsidized LPG cylinders and 0
deregulation of diesel prices are positive for the stock.
Sep-14
Nov-13

Apr-14

Jul-14

Nov-14
Feb-14

Oct-14
Jan-14

Mar-14
Dec-13

Jun-14
May-14

Aug-14

At the price of `470.4, the stock is trading at P/E multiple of 13.3x of its
FY14 EPS of `35.3.
CNX Nifty GAIL (India)

*Consolidated numbers
 Research report::Indian Oil & Gas Industry

December 4, 2014

Indian Oil Corporation Ltd. (IOCL)

Investment Rationale Stock Data
Current Market Price (`) 347.0
 The pipeline division of IOC is currently implementing 13 projects at a
Target Price (`) 399
cost of `68.0 bn to expand its network of crude oil and product
Potential upside (%) 15
pipelines during the 12th Five Year Plan period (2012-17). This
Reuters Code IOC.NS
expansion would result in an additional throughput capacity of 15.5
mn tonnes per annum (MTPA) and a pipeline length of 3,200 kms. Bloomberg Code IOCL:IN
Moreover the several other LPG (liquefied petroleum gas) pipeline
projects are also being planned to leverage the multiple advantages of Key Data
pipeline transport. Market Cap (`bn ) 842.4
52-Week Range (`) 411-194
 With continued diesel price hikes, appreciating rupee and soft crude
1-yr Avg. Daily Trading Value (`mn) 1.1
oil prices, there is high probability that diesel under recoveries might
Promoters (%) 68.6
be wiped out before the end of the next quarter. This would
substantially improve predictability of earnings for the entire OMC FII Holding (%) 2.4
pack. Better cash flow from government will add to interest cost DII Holding (%) 4.6
savings. ROEs should improve considerably over the next few years. Public & Others Holding (%) 24.4

 IOC’s new refinery in Paradip, with a refining capacity of 15 mn tons Fiscal Year Ended
per annum, is expected to be commissioned by H2FY15E, which in Y/E March* FY13 FY14
turn would lead to higher earnings performance. We also expect IOC’s EBIT Margin (%) 2.5 2.9
total borrowings to decline over the next 12 months as the level of fuel
NPM (%) 1.0 1.4
subsidies falls. The company funded the cost of subsidising fuel prices
with short-term borrowings until the government reimburses them. We EPS (`) 18.3 29.2
expect the newly elected government to continue, if not speed up, Book Value per share (`) 259.6 279.7
efforts to deregulate fuel prices in India.
P/E (x) 18.9 11.9

Valuation P/BVPS (x) 1.3 1.2

EV/EBITDA 12.4 10.0
IOC posted healthy performance in FY14, mainly on the back of lower
subsidy burden. Further, full diesel deregulation will lead to lower interest ROCE (%) 10.8 11.3
costs. We see earnings growth in the next two years from the improvement ROE (%) 7.1 10.4
in GRM due to commercialization of Paradip refinery and lower interest
expense on continued diesel price hike. We believe that stabilization of the One Year Relative Price Performance
currency coupled with de-regulation of petroleum product prices should
result in an improvement of profitability for the company by way of better 200
realizations. 150

At the price of `347.0, the stock is trading at P/E multiple of 11.9x of its 100

FY14 EPS of `29.2. 50

0
Jul-14

Sep-14
Nov-13

Apr-14

Oct-14
Nov-14
Jan-14

Mar-14
Dec-13

Jun-14
Feb-14

Aug-14
May-14

CNX Nifty IOCL

*Consolidated numbers
 Research report::Indian Oil & Gas Industry

December 4, 2014

Oil & Natural Gas Corporation Ltd. (ONGC)

Investment Rationale Stock Data
 Continuing its dominant position in domestic upstream O&G industry, Current Market Price (`) 370.9
ONGC is the he largest producer of oil and gas in the country (from its Target Price (`) 430
domestic operations) contributing 69% of oil and 70% of natural gas Potential upside (%) ~16
production. ONGC also has presence in the downstream business
Reuters Code ONGC.NS
activities through its subsidiary MRPL.
Bloomberg Code ONGC:IN
 ONGC continues to maintain a healthy reserve replacement ratio (RRR)
since last nine years, with 14 oil & gas discoveries in the domestic
fields, adding 84.99 million tonnes oil equivalent (mmtoe) of Ultimate Key Data
Reserves in FY14 (89.76 MTOE including its share in joint ventures), Market Cap (`bn ) 3,172.8
the highest in last 23 years. Thus we believe that the company’s huge 52-Week Range (`) 264.0-472.0
reserve base and consistent growth in RRR continued to provide a 1-yr Avg. Daily Trading Value (`mn) 4.8
strong growth visibility. Promoters (%) 68.9
 During Q2FY14, ONGC’s crude oil production from nominated field FII Holding (%) 7.2
grew by 2.10% YoY and 1.86% QoQ to 5.21 MMT while natural gas DII Holding (%) 10.4
production fell 5.77% QoQ and 8.87% YoY to 5.676 BCM. ONGC Public & Others Holding (%) 13.5
notifies two more hydrocarbon discoveries; one new Prospect
(GKS092NAA-1 (NELP block GK-OSN-2009/ 2) at Kutch Offshore Fiscal Year Ended
shallow water) and one New Pool discovery at well RSAK (R-184) in
Y/E March* FY13 FY14
Rudrasagar ML Block, North Assam Shelf, A&AA Basin. With this, ONGC
EBIT Margin (%) 26.8 28.5
notified total 10 discoveries (5 new Prospects and 5 new Pools) so far
in FY15. Further, the company revised its overseas subsidiary ONGC NPM (%) 14.4 14.6
Videsh Ltd. (OVL) production target to 8.47/8.29 MMTOE for FY15-16E EPS (`) 28.3 31.0
owing to lack of clarity on Sudan/Syria production restart due to 178.3 201.1
Book Value per share (`)
ongoing geo-political reasons.
P/E (x) 13.1 12.0
 ONGC is targeting mid-2018 for start of natural gas production from its P/BVPS (x) 2.1 1.8
Krishna Godavari basin KG-D5 block. ONGC is using cluster approach
to bring oil and gas finds in the block KG-DWN-98/2 or KG-D5, next to EV/EBITDA 7.4 6.9
Reliance Industries ' Bay of Bengal block KG-D6, to begin production by ROCE (%) 25.2 61.2
2018-19. The block (KG-D5) is divided into the Northern Discovery Area ROE (%) 15.9 15.4
(NDA) and Southern Discovery Area (SDA). Estimated reserves of NDA
are 121 million tons of oil in-place and 78 billion cubic meter of initial One Year Relative Price Performance
gas in place and that of SDA are 80.9 bcm of initial gas in place.
180
Valuation 160
140
We remain optimistic on ONGC from a long-term viewpoint due to potential 120
reserve accretion from its large E&P acreage. ONGC’s overall production is 100
expected to fare better as its IOR/EOR initiatives and marginal fields 80
60
development would improve the efficiency. The new discoveries and 40
acquisition of overseas assets would act as a catalyst further. Considering 20
the expected improvement in the production at both, oil and gas 0
Sep-14
Dec-13

Mar-14

Apr-14

Aug-14

Dec-14
Jun-14

Jul-14

Oct-14
Jan-14

Nov-14
Feb-14

May-14

operations and the government’s recent policy reform initiatives regarding

petroleum pricing, ONGC seems to be an attractive play at the current
valuations. At the price of `370.9, the stock is trading at P/E multiple of
12.0x of its FY14 EPS of `31.0. Nifty ONGC

*Consolidated numbers
 Research report::Indian Oil & Gas Industry

December 4, 2014

Disclaimer: “This document has been prepared by Action financial services India ltd.(AFSIL) This Document is subject to changes without prior
notice and is intended only for the person or entity to which it is addressed to and may contain confidential and/or privileged material and is not
for any type of circulation. Any review, retransmission, or any other use is prohibited. Kindly note that this document does not constitute an offer
or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction.

Though disseminated to all the customers simultaneously, not all customers may receive this report at the same time. AFSIL will not treat recipients
as customers by virtue of their receiving this report.

The information contained herein is from publicly available data or other sources believed to be reliable. While we would endeavor to update the
information herein on reasonable basis, AFSIL, its subsidiaries and associated companies, their directors and employees (“AFSIL and affiliates”) are
under no obligation to update or keep the information current. Also, there may be regulatory, compliance, or other reasons that may prevent AFSIL
and affiliates from doing so. We do not represent that information contained herein is accurate or complete and it should not be relied upon as
such. This document is prepared 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 document should make such investigations as it deems
necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in this document (including the merits
and risks involved), and should consult its own advisors to determine the merits and risks of such an investment. The investment discussed or views
expressed may not be suitable for all investors. We do not undertake to advise you as to any change of our views. Affiliates of AFSIL may have
issued other reports that are inconsistent with and reach different conclusion from the information presented in this report.

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 AFSIL and affiliates to any registration or licensing requirement within such jurisdiction. The securities described herein may or may not be
eligible for sale in all jurisdictions or to certain category of investors. Persons in whose possession this document may come are required to inform
themselves of and to observe such restriction.

AFSIL & affiliates may have used the information set forth herein before publication and may have positions in, may from time to time purchase or
sell or may be materially interested in any of the securities mentioned or related securities. AFSIL may from time to time solicit from, or perform
investment banking, or other services for, any company mentioned herein. Without limiting any of the foregoing, in no event shall AFSIL, any of its
affiliates or any third party involved in, or related to, computing or compiling the information have any liability for any damages of any kind.