Crude shock: All's not well for OMCs

Analysts bet on state-owned companies with a strong upstream portfolio

Fall in crude prices is a big relief for India's state-owned oil and gas sector, as their subsidy burden would come down sharply. But the view on oil marketing companies isn't very positive in the coming year. While the oultlook for upstream companies like ONGC remains positive as its output is expected to go up, the consensus view on refiners and oil marketing companies is bearish.

CLSA has a buy rating on ONGC as the brokerage believes the stock is pricing in an extremely high 93% subsidy burden. "The actual proportion is likely to be much lower and risk-reward appears attractive at current levels. ONGC is one of the cheapest global exploration & production names and our top play on reforms. Clarity on the subsidy formula should drive a rerating." With oil prices coming down and the domestic prices of petrol and diesel are purely market determined, the subsidy burden would be near zero on these two items in the second half believe analysts.

Axis Capital too prefers ONGC to Oil India. The brokerage says despite OINL’s high leverage to crude realisation and gas prices, it prefers ONGC in long term due to ONGC’s broad-based production growth in the coming years.

However, the view on oil marketing companies remains not as optimistic as operational issues remain. Analysts have are more negative on HPCL as the company's return on capital employed has languished at  9% with no operational improvement over FY11-14, says Spark Capital.

Also, in terms of refining margins GRMs, the industry isn't looking promising as the differential between light and heavy crude has narrowed, which will impact the refining margins of Indian refiners. In the second quarter, all refineries saw a sequential decline in refining margins. IOC’s negative GRM of $2/bbl was a negative surprise. Analysts prefer BPCL primarily for its upstream portfolio. IIFL says BPCL continues to be top pick amongst the three OMCs owing to its prolific upstream portfolio.