Oil firms: Earnings get a boost

The auto fuel price hike lowers losses for oil retailers and the subsidy bill for ONGC.

The Street has interpreted the fuel price hike to mean that a deregulation of oil prices is now unlikely in the near future. Nevertheless, the 6-10 per cent hike in the prices of automobile fuels is good news for the oil marketing firms which will now earn better realisations for petrol and diesel. It’s also good news for ONGC because it need to fork out less to compensate the oil marketing firms for losses on retail sales and that’s why the stock rose 7 per cent.

Also, if GAIL was up 8 per cent, it’s because ONGC and GAIL may not have to pick up the Rs 30,000 crore tab for the under recoveries ( the difference between the higher cost price and the lower selling price) on kerosene and LPG, though there isn’t enough clarity on this yet.

As for BPCL, HPCL and IOC, which didn’t move much, these stocks have already had a fairly good run in the past couple of months. Also, even after this hike oil retailers will continue to lose some money on both diesel and petrol — the total loss is estimated at just over Rs 14,000 crore and they will continue to sell kerosene and LPG at less than cost.

So, while these firms are now better placed to deal with the higher price of crude oil, currently at $70 per barrel, they’re still not out of the woods. Among the three oil marketing firms, BPCL stands to gain the most because it has a relatively higher share of auto fuels of close to 58 per cent.

Analysts believe that ONGC’s earnings could rise by an additional 12 per cent in the current year due to lower subsidies and better net realisations. However, they point out that the oil major’s costs are likely to increase whereas production levels could be somewhat subdued in the near future. Although, the stock is trading at a discount to global upstream E&P peers they feel the current price of Rs 1127 is a fair value.

Analysts aren’t tweaking their numbers for oil retailers just yet since the proportion in which subsidies will be shared, between the upstream firms and themselves, is not too clear.

Given that crude oil prices could rise, they believe BPCL (Rs 453) and IOC (Rs 549) are trading above their fair values though there could be some upside in HPCL which is relatively cheaper and trades at 0.8 times price to book value.