 "Maintain stable outlook on oil & gas sector: India Ratings")
The existing ratings of private sector companies have sufficient headroom to withstand the impact of muted global growth and further moderation in gross refining margins (GRMs).
Although the US was so far the largest importer of crude globally, its increasing energy sufficiency may have a moderating influence on global crude oil prices. As such, in the absence of any significant adverse geo-political event, the agency estimates the average monthly brent crude prices till FY15 to be in the range of $104 per barrel to $108 per barrel.
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While Dubai crude is likely to exhibit an average monthly price in the range of $102 to $106 per barrel. Geopolitical positives such as options of increased supply from Iran and Libya may add to the bearishness of crude prices.
However, Organisation of Petroleum Exporting Countries (OPEC), responsible for around 40% of global crude production and around 60% of global traded crude, may lower its output as it has done in the past, in the face of moderation in crude oil prices. While global crude prices may slip below $100 per barrel in some instances, they are unlikely to remain at such levels for a sustained period in FY15.
The price of Indian crude basket may reduce by $2 to $4 per barrel in FY15. This, along with muted incremental demand for crude oil in FY15, is unlikely to deteriorate gross under recoveries (GURs) in US dollar terms during the year from FY14 levels.
However, if the India rupee depreciates significantly against the US dollar, any benefit in GUR (in rupee terms) may be wiped out. Furthermore, given the fiscal deficit target, the time lag with respect to the actual transfer of subsidy to oil marketing companies is likely to persist in FY15.
The capacity use of refiners globally is below the long-term average. Given the tentative recovery in global economy, demand for distillates is likely to remain muted. However, the capacity concentration of refiners in Asia may suppress the margins of Asian refiners more than that for refiners in other regions.
This may particularly impact refiners with refineries of higher complexity, designed for distilling heavy / sour crude in a scenario of narrowing of the spread between sweet / light and heavy / sour crude. As such, Indian players are unlikely to have GRMs in excess of $8 per barrel, as was seen for the major part of FY13, while at least a quarterly GRM falling below $7 per barrel is not a remote possibility.
The outlook on public sector OMCs could be revised to negative if their links with the government weaken, especially if they are forced to bear a significant part of the GUR burden which is likely to significantly deteriorate their financial profile.
The outlook on private oil companies could be revised to negative if debt-funded capex increases significantly or profitability is significantly lower than projected. Indian refiners operate at capacity levels in excess of 100%, much higher than utilisation levels in China.
A higher-than-expected decline in GRM (in the Asian region) may force other Asian refiners to increase capacity utilisation so as to address issues of high operating leverage, possibly even triggering a further collapse in the GRMs of Indian refiners.