 "Better realisations to boost earnings of crude oil producers")
The decision by the Organization of the Petroleum Exporting Countries (Opec) to cut crude oil production after a gap of eight years brings respite to producers here.
With Brent crude oil back at $50 levels, stock prices of exploration and production entities in the sector are headed north. Oil and Natural Gas Corporation (ONGC) saw a new 52-week high of Rs 298.65 on Friday; Oil India recovered lost ground after weak September quarter results. Cairn India continued to trade near a 52-week high; Selan Exploration has bounced back from its lows.
The higher crude price is expected to boost earnings of all these companies, though there is doubts if these higher levels would sustain over the medium term. Analysts at Kotak Institutional Equities say a potential production cut of 1.2 million barrels a day by Opec and 0.6 mn a day by non-Opec producers, if implemented, could lead to a short-term spike in crude prices. Nevertheless, surplus inventory, price-led recovery in the US and incremental supply from Brazil, Canada and Kazhakstan might prevent a sustainable recovery beyond $60-65 in the medium term.
However, average crude prices should be much higher as compared to the first-half average, propping earnings for these companies and thereby keeping stock prices firm.
Upstream companies remain major beneficiaries. While ONGC and Oil India got a respite from underrecoveries after fuel price decontrol, their realisations remain subdued.
Oil India had seen crude oil realisation of $44.6 a barrel. This, coupled with lower gas prices, led to a nine per cent decline in operating profit during the September quarter. This had led to a five per cent fall in the stock from a high of Rs 446. At lower crude prices, negatives from lower net realisation outnumber the benefits from reduction in oil under recovery. Similarly with ONGC, whose stock prices have been tracking crude oil of late. Both companies will benefit from higher crude prices.
Cairn India will be another beneficiary. In the second quarter of FY17, its revenue was Rs 2,026 crore, higher than the earlier estimate of Rs 1,950 crore and benefited by a 10 per cent sequential rise in realisation to $41.6 a barrel. The company thereby saw operating profit grow 31 per cent sequentially.
However, looking at the proposed merger with Vedanta, its stock price will track the former's, which are gaining on a rally in base metal prices.
Oil marketing companies (OMC’s), though, could see a neutral to negative impact of higher crude oil prices, as they benefit from free pricing, strong demand and stabilising capacity additions, which will continue to drive their earnings. Sachin Mehta at Centrum Broking views upstream and refining/petchem companies, led by ONGC and GAIL, to be key beneficiaries in an environment of higher prices.
He sees a neutral impact for OMCs and a sentimentally negative impact on Petronet LNG, as price differentials between long-term and spot contracts would widen, straining the offtake and marketing margins.
