The recent hike in the windfall tax by the government is likely to impact the profitability of the Indian upstream companies and their cash accruals but will keep their realisations healthy, well in the range of $70-75 per barrel, as per analysts.
“I think the govt has maintained their (upstream companies’) realisations and have not cut deep into it. However, it will impact the profitability of upstream companies and cash accruals. Upside will be lost,” said Prashant Vasisht, Senior Vice President and Co-Group Head, Corporate Ratings, Icra.
Vasisht noted that realisations for upstream companies have remained in the range of $70-75 per barrel net of the windfall tax which is healthy for undertaking capex.
“Currently, crude is at $91 per barrel, which again brings upstream companies’ realisations to $70-71 per barrel range,” Vasisht said.
The government on Thursday has hiked the windfall tax on petroleum crude to Rs 6,800 per tonne from Rs 4,900 with immediate effect. This is the fifth time since February the government has hiked the tax.
On March 15, the government raised the windfall tax on petroleum crude to Rs 4,900 a tonne from Rs 4,600.
This is the 39th revision of windfall tax after it was first imposed in July 2022. An increase in windfall tax comes against the prospects of upstream oil companies such as Oil and Natural Gas Corp and Oil India, moderating their chances of high profitability. The government levies windfall tax when an industry earns large profits unexpectedly. These taxes are reviewed every fortnight on the basis of oil prices and fuel margins in the international market.
Post the announcement, shares of upstream oil companies Oil and Natural Gas Corp and Oil India Ltd fell as much as 2.5% on April 4.
The revision in windfall tax comes amid the rising global oil prices which touched $91 per barrel on Friday on the back of escalating tensions in the Middle East and between Russia and Ukraine.
Moreover, as crude prices continue to surge, if sustained, could hamper the profitability of the state-owned oil marketing companies too.
Crude prices at $90 per barrel can mark heavy under recoveries on diesel, Vasisht had earlier said.
“Every $1 increase in crude prices reduces margins by 30-40 paisa per litre,” said an analyst who did not wish to be identified. “Because of the price reduction and in the run up to the elections, they (OMCs) may be exposed to (rising) oil prices.”