Diesel deregulation, gas price to have positive impact on oil cos: Fitch Ratings

But says the rating outlook for Indian oil and gas entities remains stable in 2015

Key oil and gas sector reforms like diesel deregulation and a new gas pricing policy will have a positive impact on companies engaged in fuel retailing and gas production, says a report by Fitch Ratings.

But the rating outlook for Indian oil and gas entities remains stable in 2015, it said.

"The benefits from the oil price reforms and lower global oil prices for refining and marketing companies will be offset by their large capex needs in the medium-term, which will lead to negative free cash flows.

"The low global oil prices will hurt the cash generation of the upstream companies that have heavy exposure to oil, while the state-owned production companies will have to also cope with the still-large discounts that they have to offer to local refiners," the report said.

Expecting oil prices to remain under pressure, Fitch Ratings said deregulation of diesel prices in October will help in lowering the under-recoveries (which is nothing but international petroleum prices minus the subsidised retail rates).

Subsidies are now only applicable to household liquefied natural gas (LPG) and kerosene.

"The reduction in under-recoveries will mean a substantially lower working-capital requirement and related debt for the state-owned oil marketing companies - Indian Oil Corp (IOC) and Bharat Petroleum Corp Ltd (BPCL). The lower crude oil prices will also reduce working-capital needs," it said.

The deregulation provides a level playing field for private players -- Reliance Industries and Essar Oil Ltd -- to market petroleum products.

"However, it will take some time for these players to meaningfully expand their retail network. This could be negative for the profitability of retail operations of three dominant state-owned marketing companies, while we expect limited competition in the short-term," it said.

The lower oil prices have substantially reduced the net margins of the two state-owned upstream companies, Oil India Ltd (OIL) and Oil and Natural Gas Corp (ONGC), net of the $56 per barrel discount provided to refiners to make up for part of under-recoveries.

Fitch expected the government to reduce this burden considering the low oil prices as well as lower under-recoveries following diesel deregulation.

"The upstream operators' cash generation and ability to spend on M&A will be limited without a significant reduction in this discount," the report said.