MC:Edelweiss Sec prefers ONGC amongst oil marketing cos
The government increased the upstream oil companies' contribution toward fuel marketing firms' subsidy burden to 38.5% of its total subsidy in this fiscal, reports CNBC-TV18, quoting sources. Due to this move, upstream oil companies will have to bear Rs 30,000 crore in FY11.
Kirit Parikh, Member of Planning Commission from Government of India, in an interview with CNBC-TV18's Mitali Mukherjee and Udayan Mukherjee, gave views on whether the government should have a re-look on the subsidy sharing mechanism and will it impact most of the oil manufacturing companies (OMCs).
Parikh said, "I would expect some increase in diesel price. Because currently, there is large difference between petrol and diesel price and that creates much distorted oil market."
Niraj Mansingka, VP of Institutional Equities from Research at Edelweiss Securities giving a stock specific view on the oil and gas sector in the wake of the upstream subsidy said, "Among the oil marketing companies and ONGC, I still prefer ONGC as a better bet. This is because oil marketing companies will always be exposed to the vagaries and the earnings the moment the crude prices move upwards."
"But, overall in the oil and gas space I would still prefer Reliance because its reserves right now are not at question, " he added.
Below is a verbatim transcript of Parikh's and Mansingka's interview with CNBC-TV18. Also watch the accompanying video.
Q: What did you make of the petrol price hike and what do you expect the EGoM to deliver. Are you expecting a substantial diesel price hike next week?
Parikh: I am certainly quite pleased that petrol price is been increased. It would have been much better if the petrol price have been completely freed and not sort of freed within Indian characteristic as we are doing. The signals are given by the government and only then the OMCs raised petrol prices.
Its very difficult to say what the EGoM will decide on the diesel price. I would expect some increase in diesel price. Because currently there is large difference between petrol and diesel price and that creates much distorted oil market. It promotes more people to buy diesel cars. Diesel is more efficient engine and one would expect people to buy diesel car if they are driving a lot of miles.
Unfortunately, the cheaper diesel compared to petrol leads people to buy SUVs, diesel cars. In fact the average mileage that in India we get of diesel cars is lower than the average mileage of petrol cars give. There is no energy saving by going to diesel car.
Therefore there is a strong case for increase in diesel price in order to bridge the gap between the two as well as reducing government deficit or under recoveries of the oil marketing companies. On the one hand we say there is inflation, the Reserve Bank of India raised interest rates and on the other hand we keep subsidising diesel, it makes no sense.
Q: What have you made of indications though that the subsidy sharing mechanism maybe relooked at and companies like ONGC may bear a higher burden? Where does that leave the mechanism and the sharing ratio that was worked out by your report?
Parikh: I don’t know what the new mechanism the government will define but, the mechanism we had worked out was very clear. Certainly as the oil prices goes up, larger and larger fraction of ONGC and OIL’s production from nominated blocks only which were given to them without any market sharing or a profit sharing arrangement like all the other NELP round blocks were given.
So it made lot of logical sense and provided a level playing field to all upstream companies to share part of their profit from the production that they are getting from blocks which were allotted to them without any profit sharing agreement.
That had to be an increasing share of the profits depending on as the world market price of crude oil goes up and I think that’s fair. The formula we had suggested which was an increasing share formula was a formula suggested by ONGC itself so there should have been no difficulty in ONGC accepting those.
I don’t know what the new formula the government is going to announce. I do hope that the government clarifies its stand on profit sharing mechanism upfront so that all uncertainties in the minds of investors and in the minds of the oil companies is removed.
It doesn’t cost anything politically it seems to me to define upfront what the under recovery sharing formula is. The best way is to get eliminate under recoveries itself but if you are not willing or unable to do so then it is best to clearly define upfront what the profit sharing formula is or the under recovery sharing formula is.
Also Read: Industry's total under-recovery in FY11 is Rs 78000cr: IOC
Q: Can you share with us what was ONGC's suggestion on the rising share of subsidies that they had advocated with the rising price of crude because we spoke to the ONGC Chairman yesterday and on the suggestion that the 33% upstream sharing could go up to 38%, he seemed very agitated?
Parikh: I don’t quite remember it but, what we had done was when the price goes up above USD 70 to up to USD 80, it was 20%. When it goes up from 80 to 90, it was perhaps 30%. But I don’t remember exactly. These numbers are available in our report. It went up more and more as the world market price went up.
So it just makes complete sense that this is done so because if you had a profit sharing formula like NELP round or production sharing contract then that is the kind of money the government would get. It was quite right. If ONGC’s Chairman is saying so maybe there is different idea now but this was clearly the suggestion made by the then ONGC Chairman.
Q: How are you approaching both ONGC and Oil India? How do your calculations change if indeed this subsidy sharing burden goes up for both of them?
Mansingka: First of all the numbers are not yet frozen, they are more speculative because the decision has yet not been taken. But assuming the 38.6% of the upstream share remains, ONGC earnings will fall by almost Rs 3 per share for FY11.
This is almost 7% impact on the company’s earnings. There is negative impact and yesterday almost 7% correction in this stock price. Market has factored those incremental news totality. Market is also believing that what is the higher subsidy sharing is coming in.
Q: Which one would you have more comfort holding on to if at all, the upstream companies ONGC or the oil marketing companies?
Mansingka: Among oil marketing companies and ONGC, I still prefer ONGC as a better bet. This is because oil marketing companies will always be exposed to the vagaries and the earnings the moment the crude prices move upwards.
ONGC at least we know that the earnings have an impact to the extent of 5 to 15% range on expectation of higher sharing or lower sharing that they will be sharing on the under recoveries.
But, overall in the oil and gas space I would still prefer Reliance because its reserves right now are not at question. The question is more about the cash flows in the recent times.
There is negative news coming in on the gas production which is leading to the correction in the stock. But till the time we don’t have a question on reserves Reliance is also a good stock to look at.
Tags: government , upstream oil companies , Government of India , Kirit Parikh
