Crude Oil, LNG Prices to Remain Firm; CGD Business to Grow

India Ratings and Research (Ind-Ra) has maintained a stable outlook on public and private oil and gas entities for the remainder of FY19. Ind-Ra expects public sector companies to sustain their strong linkages with the government and maintain business stability in cases where the ratings are based on standalone financial profiles. Upstream entities will benefit from likely strong domestic crude oil prices and a moderate subsidy burden in 2HFY19. Conversely, downstream entities would sustain their gross refining margins, due to a higher crack spread and continued inventor y gains, driven by high crude oil prices. Although continued capex could moderately increase their leverage ratios, credit profiles would remain comfortable.

Ind-Ra expects crude oil prices to remain between USD65/bbl-USD70/bbl in 2HFY19, driven by increasing geo-political tensions, OPEC supply cuts and draw downs in crude oil inventory stocks along with slower growth in the total exploration capex in the US.

The higher crude oil prices along with higher crack spreads for diesel and kerosene, improved refining complexities, better distillate yields and a strong domestic demand supporting high capacity utilisation are likely to support the gross refining margins of oil marketing companies for the remainder of the year as well. City gas distribution (CGD) network is likely to significantly expand, with 78 geographical areas approved for issuance out of the 86 in the 9th CGD Bidding Round. Around 1.53 million piped natural gas connections and 537 compressed natural gas stations are to be built by September 2020, according to the phase out plan by Petroleum and Natural Gas Regulatory Board, leading to an estimated 1.7 metric standard cubic metre per day (mmscmd) additional gas volume from the CGD network till September 2020 and 3.6 mmscmd till September 2021.

Ind-Ra further expects the LNG import volumes to group in 2HFY19, despite the rise in international spot prices. LNG prices would remain firm above USD9/bbl, driven by a strong demand from China, Japan and Korea. While the incremental CGD demand is expected to be met from domestic production, growth in other sectors especially fertilizers and power would push LNG import volumes up domestically.