Oil & Gas sector overdone with demonetisation fears: Edelweiss

Demonetisation fears on oil and gas sector is overdone and the sector is accelarating towards normalcy, a report said. 

Edelweiss in its report titled 'Oil and Gas - Looking beyond numbers, better days ahead', said that the demand in domestic city gas companies- Indraprastha Gas Ltd (IGL), Green Gas Limited (GGL) and Mahanagar Gas, has been revived to pre-demonetisation levels with GGL seeing surging demand from new pockets like pharma and chemicals as well. 

"Q3FY17 was the first quarter post demonetisation and there were significant uncertainties about the spill-over effects on the sector. Predictably, downstream companies reported sequential uptick in product sales volumes. On positive side, IGL and GGL reported better volumes, while IGL and MAHGL saw some margin expansion, "Jal Irani, Analyst, Edelweiss said in the report. 

For the overall sector, the report said that it has logged a mixed performance in Q3FY17 with “aggregate” earnings up 23% YoY and 10% QoQ, but 10% below estimates. 

The report mentioned that in the current quarter (Q4FY17), 9% rally in oil will drive upstream earnings and result in some inventory gains for downstream players. Further, it mentioned that apart from the 18% drop in administered price mechanism (APM prices) in H2FY17, city gas companies will also benefit as LNG price moderates. 

"Over long term, we expect sector’s earnings prospects to remain favourable on: Gradual uptick in oil; better GRMs and retail margins; improving gas competitiveness; and stabilisation of new and upcoming refining capacities," Irani added.