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| Oil & Gas: Fortunes turning around |
| Vishal Chhabria & Puneet Wadhwa / Mumabi Apr 09, 2010, 00:43 IST |
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But higher crude oil prices, coupled with a cap on retail fuel prices, will affect profits of government oil marketing companies
 With global economic growth on the recovery path and crude oil prices rising, the fortunes of India’s oil & gas and petrochemicals sector are changing. To begin with, the global demand for crude oil is seen rising by 9,00,000 barrels per day (bpd) to 85.12 million bpd in CY2010, compared with the 1.5 per cent decline in CY2009. This should support crude oil prices, which have risen 20 per cent in the last two months to around $85 a barrel, and benefit companies like Cairn India.
Gross refining margins (GRMs) and petrochemical cracks have also begun to improve, benefiting companies like Reliance Industries, standalone refineries like MRPL, and petchem producer Gail. The significant decline in demand, coupled with new capacities, had led to a sharp decline GRMs in the past. “However, from here on, utilisation (refinery) will improve gradually, as new capacities will be lower than the demand growth of about 1.8 million bpd per year,” said Edelweiss Securities’ analysts in a report. They expect GRMs to increase from $6.1 per barrel in CY09 to $10.6 per barrel in CY11 and say that GRMs have already picked up in CY10.
Overall, analysts are bullish on private players like Reliance Industries and Cairn India. Additionally, higher crude oil prices will aid demand for oil exploration and production services provided by companies like Aban Offshore, Dolphin Offshore and Shiv-Vani. These will gain from the higher demand (improved utilisation of equipment) and later, improved rentals (on equipment). A case in point is Aban. The company, which has seen the number of idle rigs decline in recent past, signed a rig-deployment contract on Thursday that will earn the company $159 million (Rs 700 crore) in revenues over four years starting end-2010.
Contrarily, higher crude oil prices, coupled with a cap on retail fuel prices, will affect profits of government-owned oil marketing companies (OMCs), while ONGC and Oil India could end up sharing a higher subsidy burden. Given the current situation, Centrum’s analysts estimate underrecoveries to rise to Rs 80,000 crore by the end of 2010-11 from an estimated Rs 46,000 crore in 2009-10. An appreciating rupee and improving GRMs are positives for OMCs, but not enough to offset the pressure from underrecoveries. Not surprisingly, stocks of ONGC and Oil India have fallen as against a rise in Sensex since end-February 2010.
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