 "Improving outlook for Oil India")
The price fall in crude oil to its lowest level since 2010 has come as a boon for state-owned oil and gas companies.
Lower prices not only leads to a drastic reduction in underrecoveries but also means working capital. Underrecoveries arise as the oil marketing companies (OMCs) retail petroleum products at below the cost of production. While lower crude oil prices benefit all public sector oil and gas majors, it accrues more positives for upstream entities (exploration and production, as opposed to refining) Oil India and Oil and Natural Gas Corporation. These bear a majority of the subsidy (underrecovery) burden.
Analysts at Deutsche Bank feel ONGC and Oil India (OIL) will be key beneficiaries of the falling oil subsidy, as they expect them to fund about 65 per cent of the fuel subsidies (the rest to be borne by government). For OIL, there are other gains as well.
The diesel pricing reforms that have continued over time have also accrued positives and with Brent crude now down 24 per cent from the highs of $115/barrel in June to $84-85/barrel, it adds to the benefits. The OMCs are estimated to be making a profit of a little more than Rs 3 a litre of diesel, after losses for so many years. While the government might cut diesel prices, the oil and gas majors should still see zero underrecoveries on its sales, a big positive. Analysts at Deutsche Bank feel elimination of the diesel subsidy will lead to a 24 per cent rise in net crude realisation to $58/barrel by FY16. They estimate a potential $700 million annual (i.e 160 per cent over FY14) improvement in OIL's cash flows over FY14-20, driven by higher realisations.
Better realisation, higher gas prices and gradual ramp-up in production is likely to drive OIL's earnings, as well as return on equity (RoE). Analysts see a 500 basis points increase in the company’s RoE as oil and gas production is estimated to grow by 6.8 per cent annually over FY14-17.
The company might benefit further if the proposed 50:50 subsidy sharing mechanism is adopted by the government. Analysts see a 20 per cent reduction in subsidy burden if the proposal is accepted and the current ad hoc sharing is done away with. Risks, however, can be posed by disruption of production and expansion due to any disturbances in the northeast and if the demand of state governments for higher royalty is accepted.
Lower prices not only leads to a drastic reduction in underrecoveries but also means working capital. Underrecoveries arise as the oil marketing companies (OMCs) retail petroleum products at below the cost of production. While lower crude oil prices benefit all public sector oil and gas majors, it accrues more positives for upstream entities (exploration and production, as opposed to refining) Oil India and Oil and Natural Gas Corporation. These bear a majority of the subsidy (underrecovery) burden.
Analysts at Deutsche Bank feel ONGC and Oil India (OIL) will be key beneficiaries of the falling oil subsidy, as they expect them to fund about 65 per cent of the fuel subsidies (the rest to be borne by government). For OIL, there are other gains as well.
The diesel pricing reforms that have continued over time have also accrued positives and with Brent crude now down 24 per cent from the highs of $115/barrel in June to $84-85/barrel, it adds to the benefits. The OMCs are estimated to be making a profit of a little more than Rs 3 a litre of diesel, after losses for so many years. While the government might cut diesel prices, the oil and gas majors should still see zero underrecoveries on its sales, a big positive. Analysts at Deutsche Bank feel elimination of the diesel subsidy will lead to a 24 per cent rise in net crude realisation to $58/barrel by FY16. They estimate a potential $700 million annual (i.e 160 per cent over FY14) improvement in OIL's cash flows over FY14-20, driven by higher realisations.
Better realisation, higher gas prices and gradual ramp-up in production is likely to drive OIL's earnings, as well as return on equity (RoE). Analysts see a 500 basis points increase in the company’s RoE as oil and gas production is estimated to grow by 6.8 per cent annually over FY14-17.
The company might benefit further if the proposed 50:50 subsidy sharing mechanism is adopted by the government. Analysts see a 20 per cent reduction in subsidy burden if the proposal is accepted and the current ad hoc sharing is done away with. Risks, however, can be posed by disruption of production and expansion due to any disturbances in the northeast and if the demand of state governments for higher royalty is accepted.