OMCs: Exaggerated reaction

While subsidy payout, shale gas acquisition by BPCL and a decline in crude oil prices are positives, they do not justify such upticks.

The 3-11 per cent jump in stocks of oil marketing companies (OMCs) on Monday on news of subsidy payout by the government was an exaggerated reaction by the markets. While the payout, shale gas acquisition by BPCL and a decline in crude oil prices are positives, they do not justify such upticks.

The subsidy payout had already been factored in by the market as the decision was taken earlier. Moreover, subsidy reimbursement in subsequent quarters is a regular practice. So, there is nothing new in the government shelling out Rs 14,000 crore as subsidy for 2009-10.

Though BPCL acquired shale gas acreages from Norwest Energy (Australia) at a very nominal price of around Rs 60 crore, analysts feel that with cash flows expected to start only after four-five years, the stock’s 11 per cent rise was unjustified.

If both these reasons do not merit such a large move in oil stocks, is it the drop in crude oil prices?

Prices, which had risen to $82 a barrel in the recent past, now stand at $72-73 a barrel. The decline is consequent to weak outlook for crude oil. Last week’s economic data showed US jobless claims hitting a nine-month high and the US regional manufacturing contracting for the first time in a year. This has revived fears of a double-dip recession in the world’s largest economy. Atul Shah, head, commodities at Emkay, sees oil trading in the range of $70-77 per barrel in the near term. Thus, with prices going soft, the profitability of public sector oil companies is bound to see some upside.

Taking into account these developments, analysts say OMC stocks are quoting above their fair value. Hence, they are bound to correct, barring major developments like a sharp fall in crude prices.