Segment stocks rally on RIL-BP investment plan but analysts dismissive

The up to 20 per cent rally on Friday in stocks of oil exploration, equipment and services companies is expected to be short-lived. The fundamentals continue to remain weak for the segment in the near term, experts said.

On Thursday, Reliance Industries (RIL) announced it would invest ~40,000 crore ($6 billion) in three projects, over three to five years, for developing discoveries in its D6 block in the KrishnaGodavari basin, along with its 30 per cent partner, BP. The two will explore options to develop differentiated fuels, mobility and advanced lowcarbon energy businesses in India, said RIL.

Following this news, the stock prices of Jindal Drilling & Industries, Oil Country Tubular, GOL Offshore and Dolphin Offshore Enterprises (India) jumped by 12-20 per cent on Friday. Aban Offshore, Hindustan Oil Exploration Company and Selan Exploration Technology were up by three to eight per cent.

“The Reliance Industries plan is a long-term one (over three to five years) and nothing is going to change for the rigs business in the next few quarters. Also, with oil prices continuing to slide, the coming months will continue to place pressure on offshore business,” said G Chokkalingam, founder at Equinomics Research & Advisory.

Oil prices fell to a sevenmonth low on Wednesday, after US Energy Information Administration data showed a smaller than expected decrease in crude oil stockpiles last week. The outlook for crude prices remains bearish, amid rising production from the US and soft demand for petrol.

“Today’s rally was largely sentiment-based. Since these companies' assets remain partially idle due to the worldwide recession in this segment, the RIL-BP news triggered an upside. But, contracts will come to these companies much later, not in the next few quarters,” said Arnab Paul, analyst with CARE Ratings.

Another factor working against oil exploration, equipment and service companies is the continued dismantling of rigs across the globe, a sequel to declining crude oil prices. Analysts say this is hurting the offshore drilling industry and this will impact their margins in coming months.

“The current rally in should be used for exiting these stocks, as the next few quarters are seen bearish for this segment,” said Chokkalingam.

The offshore segment has been under pressure for a while. With oil prices unable to make a major upside over several months, these companies have been facing margin pressure as their assets remain under-utilised.