The nearly 25 per cent reduction in crude oil prices – to $91 a barrel against $125 in April – has brought much needed respite for oil and gas public sector units (PSUs). While the companies are expected to witness a substantial reduction in under-recoveries, despite the rupee depreciation taking away some sheen, it should also mean lower pressure on working capital. Not surprisingly, their stock prices have outperformed broader markets (see chart) in the recent past.
Though both upstream as well as downstream companies benefit, the downstream oil marketing companies (OMC) are currently seeing larger benefits accrue due to the steep petrol price rises undertaken some time earlier. The recent recommendations for calculation of octroi based on net crude realisations as compared to gross realisations provides additional relief for Hindustan Petroleum (HPCL) and Bharat Petroleum (BPCL), which have refineries in Mumbai. Any other decision by the government on price rises for diesel (expected in the near term), kerosene or LPG could provide further benefits to these companies. Among the OMCs, BPCL remains the preferred pick due to its strong exploration and production (E&P) portfolio.
Reduced under-recoveries
Though various analysts had pegged under-recoveries for FY13 at different levels, depending on their own crude oil and rupee assumptions, all estimates were significantly higher than the gross under-recoveries of Rs 1,38,500 crore seen during FY12 (average oil price of $115 and a rupee-dollar rate of 48). With reduction in crude prices, the estimates have seen substantial reduction, in spite of rupee depreciation.
| IMPROVING OUTLOOK | |||
| In Rs crore | BPCL | HPCL | IOC |
| Revenue | 251,669 | 183,815 | 395,037 |
| % change y-o-y | 18.7 | 2.8 | -8.7 |
| Ebitda | 4,200 | 3,558 | 20,850 |
| Ebitda(%) | 1.7 | 1.9 | 5.3 |
| Net profit | 1,506 | 1,070 | 8,205 |
| % change y-o-y | 14.9 | 17.5 | 108.5 |
| EPS (Rs) | 41.7 | 31.6 | 33.8 |
| PE (x) | 18.0 | 10.7 | 7.7 |
| All figures are FY 13 estimates Source: Analyst reports | |||
For instance, analysts at ICICI Securities have cut their estimates from Rs 2,00,000 crore at the start of the year to Rs 1,52,000 crore now. Analysts at Citi, too, have tweaked their under-recovery estimates to Rs 1,52,000 crore now, based on an average crude oil price of $110 a barrel and the rupee at 54 to a dollar. Though the rupee is currently around 57, crude oil prices are much lower at $91 levels. And, if they remain at current levels, FY13 could end with total under-recoveries lower than seen in FY12.
While this is positive for the oil and gas sector, the OMCs — BPCL, HPCL and Indian Oil (IOC) — find themselves in a sweeter spot. As it is, the majority burden of the under-recoveries due to sale of fuel at below-cost price is borne by the upstream companies, Oil and natural Gas Commission (ONGC), Oil India and GAIL. The reduction will not only lower the volatility in their quarterly earnings but also reduce working capital requirements for these companies and, in turn, the reduction in interest costs.
The petrol price rises undertaken by the OMCs on May 23 has helped them make a profit on the sale of petrol as compared to a loss in the recent past. Despite petrol being formally deregulated, the government had not allowed OMCs to raise prices for long due to state elections first and then with the Budget session of the parliament being in progress. With the reduction in crude oil prices, the OMCs are making a profit of Rs 4-5 a litre on petrol, say analysts. Though there is talk of some reduction in petrol price, analysts at ICICI Securities see it happening after OMCs recover more than half the Rs 2,300 crore loss incurred on its sales during April-May (prior to the price rises). The current trend should reflect positively on their profits.
The declining crude oil prices benefit OMCs in the form of reduced losses on sales of diesel, too. Diesel accounted for nearly 60 per cent of the total under-recovery in FY12. And, the OMC’s were losing close to Rs 14 per litre in early April. This under-recovery has come down to around Rs 10 per litre now, and is estimated to fall further to Rs 9 next month.
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BPCL, HPCL draw higher benefits
Among the OMCs, HPCL should benefit by a larger margin (from the fall in crude oil prices), looking at the higher marketing volumes compared to its refining capacities. This, along with talk regarding the recommendation by the government’s Petroleum Planning and Analysis Cell on the change in ONGC’s octroi charge calculations based on net crude realisations, as compared to gross crude realisations currently, has seen share prices of HPCL and BPCL gain in recent days. Sujit Lodha at Asian Market Securities observes the move (regarding Octroi calculations) will benefit HPCL and BPCL the most, since they have refineries in Mumbai and, hence, will see lower octroi charges.
From an investment perspective, BPCL remains the preferred pick of analysts. Analysts at Citi observe that with HPCL’s net debt/Ebitda (net of oil bond liabilities and cash receivable) at 3.8 times versus 1.7 times for BPCL, the stock remains the most leveraged to any positive government action on raising fuel prices, implementing deregulation, and/or providing subsidy clarity. For BPCL, its Bina refinery (BPCL holds 49 per cent stake) is ramping up well and has reported strong gross refinery margins of $11 in the March quarter. HPCL, too should gain from higher refining volumes, aided by the newly commissioned Bhatinda refinery. However, Citi analysts continue to favour BPCL as a more balanced play, with potential for upside surprises in exploration and production.