LM:Oil firms’ outlook depends on reforms, fuel price hikes
The government approved a new gas pricing formula in June that could double rates to $8.3 per mmbtu in the financial year starting April, with further increases in fiscal 2016-17. Photo: Reuters
Two key factors will influence the financial performance of oil and gas companies in 2014. One, the hike in the price of natural gas, and two, a decline in under-recoveries (or losses on selling fuel below cost).
Under-recoveries are expected to decrease thanks to regular diesel price hikes. Additionally, crude oil prices are likely to be in check owing to an increase in supply. Kotak Institutional Equities Research expects supply from non-Opec (Organization of the Petroleum Exporting Countries) sources to increase 1.8 million barrels per day in 2014, which is more than the estimated 1.1 million barrels per day increase in global demand. According to Barclays Securities India Pvt. Ltd, at an average price of $110 a barrel and Rs.61 to a dollar exchange rate, under-recoveries may fall by a fifth to Rs.1.1 trillion in 2014.
If these come to pass, that will boost investor sentiment for downstream public sector oil companies such as Bharat Petroleum Corp. Ltd (BPCL), Hindustan Petroleum Corp. Ltd (HPCL) and Indian Oil Corp. Ltd (IOC). Since the beginning of this year, while the BPCL stock has remained unchanged, shares of HPCL and IOC have declined by about a fifth each, under performing the broader markets.
It goes without saying that a sharp depreciation in the rupee will remain a key risk to these stocks.
While upstream state-run oil companies—Oil and Natural Gas Corp. Ltd (ONGC) and Oil India Ltd (OIL)—will also gain from lower under-recoveries, that will depend on how much of these benefits the government chooses to pass on.
However, both these companies will gain from the gas price hike. The government approved a new gas pricing formula in June that could double rates to $8.3 per mmbtu in the financial year starting April, with further increases in fiscal 2016-17.
ONGC and Oil India are expected to gain more than Reliance Industries Ltd from this hike, say analysts. Barclays estimates that ONGC’s and OIL’s earnings per share will increase by 7-8% for every $1 increase in gas price. In comparison, Reliance’s earnings per share is estimated to rise by only 2% by the same yardstick. On the other hand, GAIL (India) Ltd could suffer due to higher input costs.
Reliance is also not expected to gain much immediately from the gas price hike as the contribution of its exploration and production business is low and its production is not expected to improve in a hurry.
