>OIL & GAS UPSTREAM SECTOR ( DAIWA)

Ready for an upturn

Summary

■ We believe India’s oil-and-gas exploration and production (E&P) potential is being realised gradually with the success of the New Exploration and Licensing Policy (NELP). We expect E&P activity to pick up significantly over the next few years as blocks licensed out during previous rounds of NELP are explored and developed. The recent success of Reliance Industries (Reliance) (RIL IN, Rs1,893, 3) on the east coast and Cairn India (Cairn) on the west coast has given the sector an additional boost.

■ India is the fifth-largest consumer of oil in the world, and we forecast domestic demand to rise at a CAGR 4-5% over the next three-to-five years. Almost 73% of India’s demand for crude oil and 24% of its demand for gas are met by imports. Thus, new finds have a ready and expanding market. We are bullish on the longer-term prospects for crude-oil prices, and have a forecast of US$84/bbl for 2011 and a long-term forecast of US$85/bbl.

■ We initiate coverage of two pure E&P companies in India − Oil and Natural Gas Corp (ONGC)
and Cairn − with 2 (Outperform) ratings, as the stocks offer 7% and 6% upside potential, respectively, to our six-month target prices. We believe Reliance is also an exciting E&P play,
although its other businesses (such as refining and petrochemicals) are also significant.

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