| Still on slippery path |
| Sarath Chelluri / New Delhi December 21, 2009, 0:54 IST |
Although the market is hopeful of a solution to the subsidy issue, crude oil prices and the quantum of oil bonds would decide the near-term fate of OMCs.
The delay in the issue of oil bonds by the government ensured that all the three public sector (PSU) oil marketing companies (OMCs) did not pay the third instalment of advance tax due on December 15, 2009. This is an indication of OMCs either making losses on the sale of retail fuels due to higher crude oil prices or have paid excess tax in the first two instalments (quite unlikely).
Meanwhile, the markets are hopeful of a workable solution to the subsidy burden that OMCs and upstream companies bear, which is visible from the performance of OMC stocks since July 2009—most of them outperformed except for IOC, which slipped recently. For now, the government constituted- Kirit Parikh committee, which is in the process of working out a sustainable fuel pricing model, is expected to submit its recommendations in January 2010. On the other hand, there are no signs of crude oil prices easing. Read on to know the current situation as well as the prospects of public sector oil companies.
Subsidy fall-out
The current fiscal started on a bright note for OMCs, as crude oil prices were relatively benign at around $50 per barrel in the first two months of 2009-10 compared to catastrophic levels of $145 seen earlier in 2008-09.
Lower crude oil prices and inventory gains on the back of late surge of crude oil prices in the month of June helped IOC, HPCL and BPCL reap handsome net profits in the June quarter of 2009-10. Interest burden also reduced in this period as the companies did not stretch their working capital limits. Overall, OMCs delivered a combined net profit of Rs 5,000 crore compared to massive losses of around Rs 14,500 crore in the same quarter, last year.
The honeymoon period was short-lived. As crude oil prices started inching up, OMCs financials bore the brunt again. Indian Oil Corporation (IOC) barely managed to report profits of around Rs 284 crore, while HPCL and BPCL posted net losses. The performance of the companies was impacted they sold retail fuels (petrol, diesel, Kerosene and LPG) at a discount as compared to its cost price; consequently, their under-recoveries increased. It is projected that the under-recoveries would be to the tune of Rs 45,500 crore for the current fiscal. Without the auto-fuel hike of about 10 per cent undertaken in the month of July and weakness of dollar (also since July 2009), the under-recoveries for OMCs would have only surged.
As on date, OMCs continue to incur losses on sale of retail fuels. Reiterating losses on the sale such fuels, SK Joshi, Director (Finance), BPCL says, “As on date, our under-recoveries works to about Rs 2.5 per litre on petrol, Rs 2 per litre on diesel, Rs 16 per litre of kerosene (PDS) and Rs 245 on every LPG cylinder.”
Asserting the losses faced by OMCs, IOC’s director finance, S V Narsimhan, says, "Based on December refinery gate price, we are losing around Rs 92 crore per day on the sale of the four sensitive fuels.”The only solace is that the under-recoveries would be about half of the high levels seen in 2008-09.
Another mountain to climb
The fate of under-recoveries still hangs in balance. On the back of the improving global economic outlook (and partly due to investor interest), crude oil prices have been on their way up since February 2009. However, they took a breather recently on reports of sluggish US demand and the recent Dubai financial crisis.
Regarding the crude outlook, Niraj Mansingka, analyst, Edelweiss Capital, says “Considering the demand-supply dynamics, we are positive on crude oil from a medium to long term perspective. In the immediate period, crude oil prices may hover around $ 70-75 per barrel due to the current high supplies and other factors like appreciation of the dollar.”
With under-recoveries expected to surge in the second half of 2009-10, the losses on this count is likely to be borne by ONGC (in the form of discount to OMCs) and the government (by issue of oil bonds). In the last three years, both the parties accounted for as much as 80-100 per cent.
If crude oil price sustain at current levels, the under-recoveries could hover around Rs 45,000 to 50,000 crore for 2009-10. Out of this, Rs 30,000 -33,000 crore is expected to be on account of cooking fuel and the rest on auto-fuels. With regards to cooking fuels, the Petroleum Ministry has already sought oil bonds worth Rs 20,871 crore for the OMCs to enable them make up for the losses during the first three quarters of this fiscal. However, there is no indication of when the money would flow from the government.
Towards the subsidy, major upstream companies like ONGC and Oil India have already contributed around Rs 3,600 crore towards subsidy discounting in the first half of 2009-10. With average price of crude at around $75 in the third quarter, the quantum of under-recoveries for upstream companies should also increase as compared to earlier quarters; the question is how by much, that would be answered when the government announces the quantum of oil bonds being issued.
| UNDER-RECOVERIES SEEN SURGING AGAIN | |||||||||
| in Rs crore | IOC | BPCL | HPCL | ||||||
| FY08 | FY09 | FY10E | FY08 | FY09 | FY10E | FY08 | FY09 | FY10E | |
| Gross under-recovery | 43,090 | 58,590 | 27,070 | 18,000 | 23,770 | 9,760 | 16,250 | 21,310 | 9,860 |
| Oil bonds | 19,000 | 40,380 | 13,535 | 8,590 | 16,220 | 4,880 | 7,700 | 14,690 | 4,930 |
| upstream -recovery | 14,320 | 18,210 | 8,933 | 5,980 | 7,560 | 3,221 | 5,410 | 6,620 | 3,254 |
| Net under-recovery | 9,770 | - | 4,602 | 3,440 | - | 1,659 | 3,130 | - | 1,676 |
| Blended refining margins | 9.0 | 3.7 | 3.2 | 5.7 | 5.5 | 3.0 | 6.6 | 4.3 | 3.1 |
| E: Analysts' estimates | |||||||||
Some solutions
Subsidy bulging has been a repetitive thorn in the State’s exchequer. In times of higher fiscal deficit, managing subsidy burden would be even more difficult. Amongst the most obvious ways to eliminate the perennial burden is to allow companies to mark their produce in line with global crude oil prices, namely deregulate prices. However, most experts rule out complete de-regulation as it could hurt consumers when crude oil prices shoot up.
However, introduction of de-regulation of auto fuels could be a possibility, when the committee headed by Kirit Parikh submit its recommendations. Partial de-regulation of auto fuel prices would help keep a status quo on PDS-kerosene and domestic LPG prices, which looks more likely. ONGC and Oil India have also asked for greater transparency in the manner in which their share of the subsidy burden is calculated compared to the present ad-hoc mechanism.
They have recommended to the Kirit Parikh Committee to tax crude oil producers by taking away a certain percentage of their gains over and above a certain price only. For instance, a Special Oil Tax or Windfall Tax may be levied on crude oil producers if their produce fetched any price over $60 per barrel-- 20 per cent of the incremental price over $60, 40 per cent of price beyond $70, 60 per cent for any rate above $80 and 80 per cent of the price over $ 90.
Jai Mavani, Head of Infrastructure and Government, KPMG, says, “Such a proposal, if extended to private companies, is likely to be opposed by private operators and foreign companies as it would cap their gains.”For now, he adds, “The government should clarify whether the cess, royalty and taxes to be paid by the upstream companies are on the post-discount prices or not.” Lastly, the market is also looking forward to the Kirit Parikh committee for a workable solution on the subsidy mechanism, besides its other recommendations to strengthen the domestic oil and gas sector.
| HOW THEY STACK UP | ||||||||
| in Rs crore | IOC | BPCL | HPCL | ONGC | ||||
| FY09 | FY10E | FY09 | FY10E | FY09 | FY10E | FY09 | FY10E | |
| Net sales | 286,105 | 211,880 | 136,557 | 106,533 | 124,694 | 95,526 | 109,997 | 115,465 |
| Interest costs | 4,208 | 2,344 | 2,404 | 1,130 | 2,107 | 1,106 | 239 | 1,217 |
