High oil prices pull down sentiment
Thanks to rising crude oil prices and depreciation of the rupee, public sector oil and gas companies have seen heightened concerns on profitability, leading to 7-19 per cent fall in their stock prices. The government’s recent decision, asking OMCs to absorb a part of retail price reduction (~1 a litre impact on marketing margins of OMCs), has been looked by the Street as a reversal of its stand on free pricing mechanism for petrol and diesel.
Though the government has maintained that it is a one-time measure, investors will remain sceptical given the upcoming elections as the government may intervene should oil prices spike, during the course of the next 10 months. Along with a falling rupee, all these have not only created uncertainty over the profitability of OMCs but also of
upstream companies such as ONGC and Oil India.
The upstream companies, for now, are benefitting from higher crude prices and rupee depreciation as it makes their production from overseas assets more profitable.
The higher gas prices also bode well for ONGC, Oil India and Gail. For ONGC, rising gas production will push up its earnings. Thus, after declining initially, their stock prices have recovered.
For GAIL, which is seen as the last one to absorb any potential
subsidies, is looked at positively. It also remains a big beneficiary of high crude oil prices, as it will improve spreads in its LPG production business and could also mean higher LNG trading margins. LPG stands for liquefied petroleum gas and LNG for liquefied natural gas. Further, though a decision on unified tariff is still awaited, the regulator has recently allowed tariff hikes for four of GAIL’s gas pipelines, which have led analysts at ICICI Securities to increase their tariff estimates by 5.6 per cent from H2FY19 onwards and FY20 earnings estimates by 3.9 per cent.
Rising international gas prices also means that GAIL’s higher priced take-or-pay US and Russian contracts will now become viable and easier for the company to sell.
Reliance Industries (RIL), India’s most valuable company, may be seeing some softness in refining business due to decline in the benchmark gross refining margins (GRMs). However, its diverse revenue streams should help offset some of this pain.
For instance, petrochemical margins are expected to be better and so is the segment’s output led by expanded capacities. A favourable exchange rate will help the two key contributors to RIL’s financials.
Analysts say RIL’s petcoke regasification project will boost its GRM by $2 a barrel over next two quarters, while new regulations will drive refining margins from the second quarter of FY20.
Peak potential for GRM stands at $18-19 a barrel in calendar year 2020, say analysts at Goldman Sachs. Performance of core (refining and petrochemicals) segments is expected to be strong going forward, and positive developments in the telecom business should drive growth further for RIL, say analysts at Motilal Oswal Securities.