If oil prices remain so, analysts expect underrecoveries to be 42 per cent higher over last year.
The BSE Oil and Gas index has declined 5.1 per cent from the start of November till now, primarily led by the oil refining and marketing companies (OMCs) – Hindustan Petroleum Corporation, Bharat Petroleum Corporation, Indian Oil Limited. It also underperformed the Sensex, that saw 4.15 per cent decline during the same period.
The index witnessed an upside of 7.7 per cent between the start of the current financial year and October 2010, catalysed by reforms in the oil and gas sector. While the reforms on administered (APM) prices and decontrol of petrol brought some respite to underrecoveries of public sector (PSU) oil and gas majors in the first quarter, their hopes were raised on diesel deregulation, too.
The three OMCs, it is estimated, sell diesel at a Rs 4.71 per litre discount to its imported cost. The markets expect the deregulation to happen before government proceeds with the divestment in PSU’s such as ONGC and Oil India. However, this seems distant in a high inflation scenario. Some concerns also remain on the subsidy sharing formulae, which is yet to be clarified by the government.
A rise in crude prices over recent days has also been a cause for concern among OMCs. Brent crude averaged $85.6 a barrel during November, before crossing $90 a barrel in early December, a level not seen since October 2008. Analysts say the rise was fuelled by a weak dollar and speculation on positive impacts of quantitative easing (QE2) by the US Federal Reserve, as demand also increased with the onset of winter.
The average price of $85 a barrel in the second half of 2010-11 till now ($77 a dollar in the first half) adds to OMCs’ woes on underrecoveries. Although petrol has been decontrolled and increments can be passed on to consumers, the case is not the same with diesel, kerosene and cooking gas. If the current crude prices are maintained for the remaining part of the year, analysts at Motilal Oswal estimate full year underrecoveries to touch Rs 65,500 crore as against Rs 46,100 crore during 2009-10.
While OMCs may be underperforming, analysts see upstream companies such as ONGC to be less vulnerable to a rise in crude. According to Motilal Oswal research, earnings from standalone operations decline from Rs 112 to Rs 109 a share with a rise in crude prices from $75 to $85 a barrel. ONGC Videsh Ltd, that contributed 9–14 per cent to ONCG’s consolidated earnings over the past four years, has seen its earnings increase from Rs 10 to Rs 14 a share.
