The global oil and gas sectors

Oil and gas sector value concatenation consists of several activities like geographic expedition and development, production and refinement and eventually storage, transit and selling. Industry volume which s an index of ingestion of oil and gas and is measured in BOE – ( 1000000s of barrels tantamount ) .

The division of Global market is as follows:

North America

Canada, Mexico, and the United States.

South America

Argentina, Brazil, Chile, Colombia, and Venezuela

Western Europe

Belgium, Denmark, France, Germany, Italy, the Netherlands, Norway, Spain,

Sweden, and the United Kingdom

Eastern Europe

Czech Republic, Hungary, Poland, Romania, Russia, and Ukraine

Asia-Pacific

Australia, China, India, Japan, Singapore, South Korea, and Taiwan

In 2009 the industry had grosss of close to $ 2220 Bn which was an one-year growing of 5 % from a period of 2005-2009. In 2009 it shrank in size by stopping point to 30 % . If we have a expression at the volumes, they reduced by stopping point to 1.5 % and reached a volume sum of stopping point to 37 Bn. The forecasted growing rate for the industry is 9 % for the five twelvemonth period from 2009-2014.

The following tabular array summarizes the growing form in the last 5 old ages.

Year

$ Billion

Euro Billion

% Growth

2005

1753.2

1260.2

2006

2027.8

1458.3

15.6

2007

2261.8

1626.6

11.5

2008

3053.6

2196.0

35

2009

2119.3

1524.1

( 30.6 )

CAGR

5 %

America is one of the largest consumer in the section and has 37 % market portion. The industry is organized such that economic systems of graduated tables affair with big to the full incorporate participants deducing benefit from it. Buyers include single and sweeping purchasers and the most of import providers are equipment suppliers.

Pre- 2009 the industry went through a period of rapid growing and declined given planetary recessive conditions. The Asia – Pacific and Euro markets had an one-year growing rate of 7.9 % and 6 % . 64 % of the market value was occupied by rough oil and had grosss of $ 1400 Bn. The natural gas section had grosss of $ 760 Bn in 2009 which was 35 % of the market ‘s grosss.

The undermentioned graph shows the market portion by geographics.

FIVE Forces ANALYSIS for Global Industry

The presence of big integrated participant increases the strength of competition in the industry. The industry is extremely vertically integrated and they have presence as purchasers and providers across the value concatenation. These extremely incorporate participants create high barriers to entry and there is immense investing and capital outgo required to get down operations. Hence all in all the barriers to entry are high. Recently the tendency has shifted towards increased demand for specialised equipment and services. This was because the trade good monetary values were rather high and therefore the companies went for researching trade goods that were thought to be dearly-won but which have proved to be gross supporters. But in 2009 the trade good monetary values saw a autumn and the range of monetary values fluctuation is unknown.

Substitutes in the oil and gas market are the renewable beginnings of energy which are deriving impulse even though they have a high cost of production and the companies would incur high shift costs.

Furthermore high capex and high sunk cost which increases issue barriers, the competition degree has intensified in the market.

Buyer Power:

As mentioned antecedently the oil and gas market consists of big entities which are good diversified and extremely vertically integrated. Due to the complex nature of the industry there are a big figure of purchasers which consequences in weak purchasing power. However purchasers which are big establishments cam do big purchases and therefore are of import purchasers. Hence loss of such clients would hold an impact on the concern so these purchasers have high bargaining power.

Crude oil and natural gas are extremely commoditized and hence their monetary values are obtained harmonizing to demand and supply conditions and declared on the exchanges of New York and London and therefore purchasing power is rather low. Typically client trueness is a really of import factor in purchaser power but since the construct of trueness is non really strong in this sector, purchasing power is strong. Hence costs associated with exchanging for persons could be higher than institutional purchaser. In entirety the overall purchasing power is weak

Supplier Power

Suppliers include equipment supplier and major participants are Schlumberger Halliburton and Baker Hughes. The industry participants are diversified and big and they have a immense portfolio of merchandises. Certain participants provide niche services and therefore have high supplier power. Many larger companies have integrated across the value concatenation and instead use 3rd party services. Since the oil and gas industry provides the providers with immense gross the provider bargaining power is rather low. Some provider like the authorities and land proprietors may hold higher bargaining power due to scarceness of the land and the resources it houses. In entirety the power of the provider is moderate in nature.

Menace of new entrants

As mentioned before since the companies are present in different parts of the value concatenation, analysis of the market is complicated. The costs of big established participants are really low dues to economic systems of graduated table. These participants have invested a batch in equipment and R & A ; D. Hence to vie with such participants, similar investing is required. Hence this acts as a significant barrier to entry. Furthermore the oil and gas industry has important sum of ordinances which once more increases the barriers to entry. Exploration and extraction requires permission from the authorities which in bend is a long process. Besides given the altering environmental scenario, the impact of the oil and industry on the environment is a concern which once more consequences in barriers.

On the other manus when the oil monetary values were at an oil clip high the grosss surpassed the costs and hence it was an attractive sector for new participants. Hence a bullish tendency in oil monetary values ever encourages capacity add-on. In entirety the menace of “ new entrants ” is moderate.

Substitutes

Substitutes can be alternate beginnings of energy. They have a positive impact on the environment but the cost of exchanging is significant. It would chiefly necessitate immense investing in R & A ; D and production installations. Furthermore as the militias reach a extremum, the importance of the alternate beginnings of energy would increase. In entirety the menace of replacements is non strong in the medium term

Competition

As mentioned before the industry mostly consists of incorporate participants, hence they have lower costs due to the immense economic systems. Furthermore the operations are such that they to a great extent labour intensive and necessitate immense investings. Hence the barriers to issues are high. Most large participants are non merely vertically integrated but besides geographically diversified. The following jet of demand is expected to come from emerging economic systems and therefore the immense demand there might cut down the strength of competition. Besides it is expected that there would be a gradual displacement to renewable beginnings. In entirety the competition is significantly strong.

Some of the taking companies in the sector are

BP

Exxon Mobil

Royal Dutch Shell

Sinpoec Shanghai Petrochemical Company

Indian Market

The Indian economic system is to a great extent dependent on imports in energy sector. The oil and gas industry is a cardinal sector and has strong linkages with assorted other sectors and has had a important function in the growing of the Indian economic system. The crude oil sector contributes 15 % to GDP and consists of the undermentioned activities

Transportation system

Polishing

Selling of Petroleum and Gas

The sector besides adds to the gross of the govt ( 64 % ) in the signifier of revenue enhancements and responsibilities. Petroluem Products are besides a cardinal beginning of foreign exchange, holding a portion of 18 % . Furthermore Asiatic refinement borders have moved higher to USD 2.5-3 Bn.

India is a cardinal market for crude oil merchandises and rough oil and is expected to be a big consumer in the hereafter. Furthermore India has invested a immense sum in oil Fieldss across the universe in states like Sudan, Egypt.

Conventionally it is believed that higher ingestion of fuel is a strong index of a flourishing economic system. However this has progressively put force per unit area on the bottom line of oil selling companies. Apart from the high economic growing, the subsidized rates is one of the grounds behind high ingestion. Consumers have no inducement to salvage as the monetary values are excessively high. Once monetary values are deregulated in the short term it might ache the retail clients but it would do India more competitory. Furthermore the OMC can better their state of affairs of under- recoveries by bear downing higher monetary values, nevertheless the govt would take action in instance monetary value rise in international market is excessively high.

The authorities has taken many progressive stairss to make a favorable policy and regulative environment for pulling investings.

It is believed that the net gross revenues place would increase to Rs 2390 Bn that is an addition of 34 % in the following financial. The operating net income is expected to increase 22 % to 311 Bn.

The Indian oil and gas market has grosss of around $ 80 bn in 2009 which is a CAGR of 10.3 % for the 5 twelvemonth period from 2005-2009.

Year

$ Billion

INR Billion

Euro Billion

% Growth

2005

51.6

2522.1

37.1

2006

62.4

3046.9

44.9

20.8

2007

76.5

3732.3

55

22.6

2008

111.2

5432.0

80.0

45.4

2009

76.3

3728.2

54.9

( 31.4 )

CAGR

10.3

In footings of volume, the ingestion increased by 4 % and reached 1.4 Bn ( BOE ) in 2009.

The growing form for the industry in the past 5 old ages is as follows:

Year

Million BOE

% Growth

2005

1162

2006

1185.5

2

2007

1263.3

6.6

2008

1330

5.3

2009

1361

2.3

CAGR

4

The prognosiss for the growing of the industry ( in footings of value ) are as follows:

Year

$ Billion

INR Billion

Euro Billion

% Growth

2009

76.3

3728.2

54.9

( 31.4 )

2010

96.1

4692.5

69.1

25.9

2011

99.7

4869.2

71.7

3.8

2012

114.9

5615.0

82.7

15.3

2013

127.8

6244.4

91.9

11.2

2014

136.9

6688.5

98.5

7.1

CAGR

12.4

The prognosis for the sector in footings of volume is as follows

Year

$ Billion

INR Billion

Euro Billion

% Growth

2009

76.3

3728.2

54.9

( 31.4 )

2010

96.1

4692.5

69.1

25.9

2011

99.7

4869.2

71.7

3.8

2012

114.9

5615.0

82.7

15.3

2013

127.8

6244.4

91.9

11.2

2014

136.9

6688.5

98.5

7.1

CAGR

12.4

Year

Million BOE

% Growth

2009

1361.3

2.3

2010

1425.3

4.7

2011

1492.8

4.7

2012

1565.9

4.9

2013

1642.9

4.9

2014

1714.3

4.3

CAGR

4.7

The oil and gas sector in India has a strong growing period followed by a diminution in 2009.

The section interruption up was follows “

Crude Oil – $ 63.5 Bn- 83.2 %

Natural Gas – $ 12.8 Bn- 16.8 %

The interruption up of the market portion of India in the Asia Pacific part is as follows:

The major Indian companies are Indian Oil Corporation Limited, Oil and Natural Gas Corporation Limited, Reliance Industries Limited.

Industry Analysis

There are chiefly 2 phases in the energy value concatenation

Upstream ( geographic expedition and production )

Downstream ( refinement and selling )

Once rough oil extracted from the militias, it is further processed. In the terminal we obtain assorted crude oil merchandises, which are farther marketed.

In India ‘s Case ONGC and Oil India have a high market portion in the upstream section of stopping point to 85 % . Major participants in the downstream section are IOC, HPCL, BPCL, Reliance. There are 19 refineries in India ( 17 in public sector and 2 in private sector ) with a refinement capacity near to 180 MMTPA.IOC has 32 % market portion in footings of refinement capacity. ONGC dominates the natural gas sector and controls 60 % production. GAIL dominates the transmittal and distribution of natural gas and has 80 % market portion. KG basin finds would supply alleviation in footings of increased supply but demand would still be mostly unmet.

The sector is still influenced by political determinations and there is high sum of political intercession.

FIVE FORCE Analysis

Supply:

Supply from the internal market satisfies 30 % of the demand for petroleum. Largely the supply of the petroleum is achieved through import. For the downstream section, refinement has had high capacity add-on. Lack of substructure support can harm the large-scale export potency of the merchandises.

Demand:

It is a reasonably good cognize fact that the handiness of crude oil thrusts economic growing in the state

Barriers to Entry:

Government permission is required In the upstream section. The sector requires immense capex and geographic expedition and development is a high investing activity presenting high entry barriers. On the other manus in the retail section, the new participants need to pump in atleast Rs 20 bn in the sector as eligibility standards.

Dickering power of providers

Since the demand supply spread is immense the dickering power of providers is high. For eg. OPEC has high bargaining power. For crude oil based merchandises, the bargaining power of the participants is low as India has surplus capacity.

Dickering power of clients

The govt. through its NELP plan provides rough oil in the upstream section. In downstream section the subsidy is shared by the refineries. Traditionally the govt has been a strong advocator of commanding the monetary values for client public assistance, ensuing in immense losingss for OMC. However with deregulating being implemented in the market, things could better for the OMC ‘s. With addition in polishing capacity, the industrial section could confront high competition.

Competitive Competition:

NELP has introduced competition in the market in the upstream section and in downstream section scene of grapevine would increase competition.

Future Prospects:

The govt has laid increased accent on oil geographic expedition outside, and is sharply purchasing assets abroad. OVL produced close to 9. MMT of oil and gas in FY 09 from its acquired assets. India has besides invested in capacities outside the state for the petrochemicals sector to increase supply in the sector.

Evaluation of a Oil and Gas Stock

A

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Profitableness is grosss – disbursals. Grosss is dependent on volumes and realizations.

Volume for oil sector is related to economic growing. Economic growing is linked to the public presentation of the major sectors of the economic system that is agribusiness, industrial and services sector. When growing increases or economic system si on upswing the demand for crude oil merchandises increases. This is because it is a beginning of energy which is the driver of any economic system. A similar analysis can be applied to client demand i.e demand for fuel for autos and CV ‘s

The industrial side

It has been observed that the demand for crude oil merchandises is normally inelastic to alter in monetary values. The cardinal user sections are as follows:

Fertilizer ( naphtha or natural gas )

Utilities ( naphtha or natural gas )

Aviation ( ATF )

Improvement in economic activity albeit growing in the power sector or energy demands, growing in foreign touristry will hold a good impact on the demand for gasoline and therefore better grosss of oil and gas companies. Therefore to analyze a oil stock overall economic activity and sectoral public presentations are of import.

The retail side

In the retail section, the income degrees is a driver of demand. Higher income would take to a higher demand for vehicles ( two- Wheeler and 4- Wheeler ) and this in bend would increase demand for fuel.

Harmonizing to estimations, Diesel ingestion is near to 40 % -45 % of entire and Kerosene and petrol 8 % and 13 % severally.

Realization

A really of import parametric quantity in this section is the realization. Before deregulating in 2002, the authorities had taken the burden of repairing monetary values of crude oil merchandises. Furthermore monetary values were cross-subsidised.

Gasoline monetary values were normally higher in comparing to their existent cost and kerosine, Diesel. LPG were sold at lower rates. However with the dismantlement of Administered Price mechanism, the scenario has changed. The monetary values are now straight related to the international petroleum monetary values. Hence when monetary values go up, Indian gasoline and Diesel monetary values would travel up excessively. Hence consciousness of international petroleum monetary values is indispensable.

Expenses

As mentioned before it is of import to cognize international petroleum monetary values. Normally rough monetary values are really volatile, Furthermore exchange rate fluctuation would besides hold an impact on cost.

Important Factors to retrieve when valuing an oil and gas company are:

Last, direction yesteryear record is indispensable. PSU ‘s are abound in this sector but still the direction ‘s enterprise in footings of stigmatization activities and capacity enlargement are indispensable.

Company Analysis

Cairn India ( CIL ) is a listed subordinate of London based Cairn Energy plc. Cairn Energy in bend was formed after the acquisition of privately-held Cairn Energy Management by Caledonian Offshore. The combined entity was renamed Cairn Energy. Changing market conditions meant that emerging markets became really attractive and Cairn decided to concentrate on South Asia. The assets of Cairn are as follows:

Ravva in Eastern India which was the first offshore oil & A ; gas field

Lakshmi gas field in Western India, discovered in 2000 and began production in 2002

The Mangala oilfield discovered in Rajasthan, ( biggest oil find in the state since 1985 )

Bhagyam and Aishwariya Fieldss

Cairn India Assetss

Cairn bought a interest in Barmer Basin from Shell as it was n’t able to happen oil and gas in the country. IN bend, Cairn was able to detect oil in this country. Mangala has been the largest oil – field discovered in India station 1985 and there is immense possible hidden in this country.

A

The undermentioned graphs high spots the fact that the company ‘s Exploration Resource Base is exposing an uptrend. Cairn has militias of near to 690 millimeters BOE in the Mangala, Bhagyam and Aishwariya belt. Extra recovery that is expected from this block is near to 290 millimeters BOE ( from EOR / IOR )

Furthermore Cairn has discovered extra resource base on the Barmer Hill, hence higher recovery is expected from this belt.

Growth Predictions

Production is believed to be near to 50 % CAGR. Furthermore as petroleum will go stronger, so would returns and realisations as shown in the undermentioned graph.

As mentioned before, there is a uptrend in the production and reserve base and hence net incomes can better bit by bit. The Rajasthan plus base is set to lift by 2.5 bn BOE.

Petroleum Monetary values

The planetary economic system is set for recovery and hence petroleum oil monetary values would demo an uptrend. IMF has predicted that universe GDP would be at 4.6 % for 2010 and at 4.3 % for 2011 which is crisp rise in comparing to last twelvemonth de growing of 0.6 % in universe GDP.

Therefore rough oil demand and therefore monetary values are set to increase in 2011. Emerging markets would be the chief beginning of this demand. IEA oil market study as besides predicted demand to be 87 mbpd which is rise of 2 %

The undermentioned graphs show the estimations of World GDP and besides how oil demand would turn with growing in GDP.

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Acreage

In entirety Cairn has a immense geographic expedition land area under its control in India which is close to 40, 000 sq kilometer which is the fourth largest plus base in the state. The company ‘s most productive plus base is in Rajasthan in the MBA belt. It besides has plus base in the KG Basin. Furthermore it has now expanded to Sri Lanka and acquired a 3000 sq kilometer block.

The undermentioned graph shows the land area interrupt up in the state.

The company has already closed its gross revenues contracts which are about 143 kilobits / d. Given that the petroleum from the MBA Fieldss is waxen in nature, the closed gross revenues understandings have laid to rest the concerns sing the saleability of the petroleum.

High Operational Efficiency

Cairn has a rich experience in researching and developing hydrocarbon resources in India. For eg. In Laksmi Basin In Cambay, Cairn started production within 30 months. At Ravva field which is located in the KG Basin production was enhanced to 50, 000 B /d.

Another nucleus competence of Cairn is the low cost with which it operates. The expencditure for Ravva filed, Lakshmi and Gauri Fieldss is near to US $ 3/ barrel.

Consequence Update ( Q4FY10 )

The grosss showed a rise of 281.2 % to Rs 692.8 crore as against Rs 181.8 crore in the old one-fourth. PAT besides showed a rise to Rs 245.2 crore. This was due to increased production from the Mangala field. Costss were higher at 120 cr hence profitableness took a hit. Train 3 would be ready by June terminal, harmonizing to direction. The Mangala production is expected to travel up to 125000 boepd.