Following the key announcements of diesel deregulation and gas price hike to over $6 per unit plus more for deep water exploration, ratings agencies Monday retained their positive outlook on the oil and gas sector, maintaining the "Buy" on stocks of state-run upstream and downstream companies.
Describing gas price hike as a key positive, ICICI Securities said the benefits of the new gas price are clear for oil public sector undertakings.
"we prefer HPCL (Hindustan Petroleum), ONGC (Oil and Natural Gas Corp) and OIL (Oil India), it said of stocks of the state-run companies.
"Reliance Industries'(RIL) D1/D3 fields will not get the new gas price until arbitration on development expenses is settled. However, RIL's other fields would get the premium gas prices applicable for deep water assets. Impact on RIL's earnings appears marginal," it added.
Regarding the new price applying to gas from the Reliance Industries' (RIL) KG basin fields in the eastern offshore, the cabinet decided that as the matter was under arbitration, RIL would be paid the earlier price of $4.2 per unit till the shortfall quantity of gas is made good. The arbitration concerns the penalty imposed by the oil ministry on the company for failing to meet output targets from the RIL-led consortium's D-1 and D-3 fields in the KG-D6 eastern offshore block to the extent of 1.9 trillion cubic feet of gas.
Maintaining its "Positive" outlook on Indian oil and gas, Barclays said the real test for diesel deregulation will come as crude prices rise.
"The measures announced are helpful for the state-owned enterprises (SOEs) despite their 18-107 percent share price rises," Barclays said.
"The gas price decisions may leave a tinge of disappointment for Reliance, though, unless the government clarifies its stance on price premiums for undeveloped deep and ultra-deep discoveries," it added.
Standard Chartered Research said that while the mechanics of diesel deregulation will emerge gradually, "it presents clear upside to diesel marketing margins, driving 7-22 percent earnings upgrades in FY16 for oil marketing companies."
Though the revised gas price of $6.1 per unit effective Nov 1 poses next fiscal earnings downside of 6-10 percent for ONGC and OIL, Stanchart said it keeps estimates unchanged and awaits clarity on subsidy sharing. "We prefer downstream OMCs (oil marketing companies) over upstream," it said of stocks.
Retaining a "Buy" on both upstream and downstream companies, with oil marketer Bharat Petroleum (BPCL) as its top pick, Bank of America-Merril Lynch (Bofa-ML), rated RIL prospects as Neutral.
"We have cut RIL, ONGC and Oil India FY15-17E EPS by 0-2 percent and PO by 2-5 percent but retain Buy on ONGC, OIL and Neutral on RIL," BofA-ML said.
Keeping their energy sector rating Neutral, Kotak was cautious on the benefits from expansion of marketing margins consequent to diesel deregulation as it expects private players like RIL and Essar Oil to compete aggressively, particularly in the western region.
Regarding the decision to allow premium prices for new discoveries in ultra deep-water, deep-water and high pressure, high temperature fields, Kotak pointed out that the government has not shared much details on its calculations.
"We expect PSU upstream companies to benefit moderately from the increase in gas prices," Kotak said.
