1. OMCs back in the black, challenges for explorers

OMCs back in the black, challenges for explorers

For India’s state owned oil refining companies, the sharp fall in global crude oil prices has meant...

By: | New Delhi | Published: February 5, 2015 9:14 AM
crude oil, crude oil prices, oil marketing companies, oil companies investors, Direct Benefit Transfer

There has been a re-rating of these companies with a reduction in subsidies borne by them for selling products below cost.

For India’s state owned oil refining companies, the sharp fall in global crude oil prices has meant renewed interest from investors after a long spell. There has been a re-rating of these companies with a reduction in subsidies borne by them for selling products below cost.

Weak oil prices and pricing reforms have rendered insignificant one of the biggest concerns of the Indian oil and gas sector: fuel subsidies. The biggest beneficiaries are oil marketing companies (OMCs). “We estimate oil subsidies to fall by 62 per cent year-on-year to Rs 27,000 crore ($4.2 billion) in FY16 on the fall in oil prices and deregulation of diesel price in FY15,” said Deutsche Bank analysts Harshad Katkar and Amit Murarka.

Further, even assuming the government funds 60 per cent of the fuel subsidy burden in FY16 (Rs 16,200 crore), successful implementation of the modified Direct Benefit Transfer (DBT) programme is likely to help cut the government’s fuel subsidy burden further by over 65 per cent by FY18. Oil marketing companies will then turn out to be medium to long-term gainers as the DBT programme gains traction. Stocks of oil majors, which have almost doubled in the last a few months are set for further gains.

Diesel price deregulation, which began in October 2014, allows oil marketing companies to price diesel at market parity and charge marketing margins based on competitive intensity.

But the current scenario, however, poses a challenge for oil explorers. The December quarter net profit of Reliance Industries dipped by 4.5 per cent to Rs 5,256 crore, its first profit decline in nine quarters, as the steep fall in crude oil prices hurt core refining business and margins. Cairn India’s bottom line fell by 41 per cent quarter-on-quarter. “Going forward, any meaningful recovery in crude oil prices will improve earnings of the company,” said Sumit Pokharna, analyst, Kotak Securities.

Thanks to the collapse in oil prices, the stocks of oil exploration companies (Cairn India, ONGC, Oil India) and Reliance Industries underperformed for the year, despite reforms carried out by the government.

However, lower oil prices aided the outperformance of oil marketing companies (HPCL, BPCL and IOC) and lubricants manufacturers such as Castrol India. With benign crude prices, the outperformance of oil marketing companies is likely to continue in 2015, driven by margin expansion.

Lower oil subsidies have already led to a significant reduction in the working capital debt of OMCs like HPCL, BPCL and IOC. Lower oil subsidies will improve the oil net realisation of ONGC and Oil India, as they fund nearly half of the oil subsidies. However, if crude oil prices bounce back, the oil sector will be back to square one.

Tags: Crude Oil
  1. No Comments.

Go to Top