"The plan, if implemented as we expect it, will be credit positive for ONGC and OIL because we expect their share of the fuel subsidies to decline by 36 per cent, or around Rs 22,000 crore, thus improving cash flows and profitability of the upstream companies," Moody's analysts Rachel Chua and Vikas Halan said in a note issued here today.
Currently, ONGC and Oil India share the fuel subsidy burden with the government on an ad-hoc basis as decided by the government and the if the plan is implemented, their subsidy share would include an oil industry development levy, an existing tax based on their crude oil production, the note said.
If the plan is implemented, upstream producers' 50 per cent share of fuel subsidy would be around Rs 50,000 crore for this fiscal, down from Rs 67,000 crore a year ago, out of which, fuel subsidies will be around Rs 40,000 crore and an oil industry development levy would be around Rs 10,000 crore, the note said.
If the government pays half of the fuel subsidies, we estimate that ONGC's revenue and operating cash flows would come down by Rs 18,500-19,500 crore in the fiscal, while OIL's would rise by Rs 1,000-1,800 crore, the note said.
"These estimates reflect our expectation that total fuel subsidies will slip to Rs 1 trillion in FY15 from Rs 1.4 trillion in FY14 as diesel prices will be fully deregulated very soon," it added.
ONGC and OIL could use the increased cash flows for investments in exploration and production, the note said.
"The proposed change in the fuel subsidy mechanism reflects the newly elected government's support for the oil and gas sector," the note said.
ONGC and OIL sell their crude oil to downstream companies at a discount, which is their share of the fuel subsidies because the latter sell refined oil products like diesel, kerosene and cooking gas at government-set prices, which are lower than production cost.
The government also takes a share of fuel subsidies by giving cash compensation to the downstream firms.