OMCs’ profitability and cash flows will continue to be strained on account of uncertainty over the future subsidy sharing pattern.
As the demand for crude oil recovers across the world and geopolitical tensions create uncertainty on supplies, prices have surged above the $100-a-barrel mark in recent times. In the existing circumstances, analysts estimate average prices of crude oil to trend upwards in the medium term. This clearly spells bad news for India’s oil marketing companies (OMCs). Higher crude prices would translate into higher gross under recoveries for upstream oil companies like ONGC and Oil India, as the government does not seem to be in a situation to raise fuel prices and carry forward its de-regulation plan.
For FY11E, India Infoline expects industry-wide gross under recoveries to be Rs 72,000 crore. This figure will change, if there’s an upward shift in the demand or crude prices. A $5 a barrel increase in yearly average crude prices would result in gross under recoveries surging by almost Rs 20,000 crore, at current level of product prices and assuming a five per cent growth in consumption.
A Macquarie report on India’s oil and gas sector says, with the government not increasing the prices for sensitive fuels (diesel, kerosene and LPG), under-recoveries on these products have ballooned in the past few weeks. “Diesel under-recoveries, the most worrying factor, are of the order of Rs 12/litre now. In case crude price average for FY12 goes up by $10 a barrel (10 per cent), the gross under-recovery estimates for FY12E will balloon from Rs 95,500 crore to Rs 122,100 crore, a jump of 28 per cent,” it adds.
Analysts say, despite rising crude prices, the government has made no attempt to either roll back five per cent duty on crude or to lower excise duties on petrol and diesel.
All this means trouble for OMCs, particularly the upstream ones. Market participants say what makes matters worse is the government’s silence on a possible subsidy-sharing formula. Even for FY11, the contribution from the government continues to remain unconfirmed, say oil analysts. A decision on subsidy sharing formula will result in better earnings visibility for OMCs, which will enable them to plan their cash flows better.
If crude prices average $100 a barrel in FY12, IIFL expects ONGC’s net realizations to be about $53 a barrel against an expected $57 a barrel in FY11. Realizations for Oil India would be at $55 a barrel. ONGC would gain from ONGC Videsh and its joint venture production as no subsidy has to be borne on volumes from these fields. OMCs’ profitability and cash flows will continue to be strained on account of uncertainty over the future subsidy sharing pattern.
