In the last six-seven trading sessions, the stock prices of such public-sector downstream companies (OMCs) as HPCL, BPCL and IOC have surged, outperforming the Sensex on the back of a drop in crude oil prices. In addition, the government recently formed an Empowered Group of Ministers for considering the Kirit Parikh Committee recommendations.
The deregulation is likely to be a tough task due to political compulsions and large under-recovery numbers for 2011-12. Given our expectation that there won’t be any policy reforms, we believe these companies will continue to trade in the range of 0.9-1.2x P/BV. Thus, there is not much return expectations from current levels.
Much like their downstream peers, public-sector upstream companies will also continue to be marred on account of policy issues. The performance of these companies, viz. ONGC and OIL, is likely to be dependent on the subsidy-sharing formula. Given that deregulation is likely to be a tough task, these companies are likely to deliver a subdued performance.
The fate of private upstream major, Cairn India (CIL), is likely to be dependent on the direction of the crude oil prices as a large part of the exploratory success and production ramp-up is built in the stock prices. We expect crude oil prices to average at around $75 a barrel in 2010-11 on account of surplus Opec capacity, coupled with significant increase in NGL production capacity. In addition, the inventory level in OECD countries is also on the higher end of the five-year averages, which is likely to prevent further upsides in crude prices.
At current price levels, Cairn is discounting a long-term crude oil price of $73 a barrel, which is high and leaves no margin of safety.
While the subdued performance by PSU oil companies (on account of uncertain policy outlook) and Reliance Industries (RIL) has seen the BSE Oil and Gas index under-perform the benchmark indices over the last six to nine months, gas transmission and distribution companies have delivered a strong performance.
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We expect RIL to deliver a strong performance on the bourses, driven by improvement in refining margins and a ramp-up in gas production. Also, positive news flows on upstream portfolio and inorganic growth plans would result in re-rating of the stock.
Gas transmission and distribution companies also continue to look attractive. Expanding network, stable regulated returns and strong earning visibility are likely to drive the performance of the transmission companies. Similarly, improving gas supplies are also likely to help. Moreover, given the uncertainty and ad-hocism associated with investment in oil stocks, gas companies are set to perform better.
(The author is MD-Institution, Angel Broking)