Brent crude oil price has corrected sharply during the December 15 quarter, but its immediate beneficiaries -- the oil-marketing companies (OMCs) -- are not reflecting the favourable market conditions in their share prices.
Brent crude, which reached $52.71/barrel on October 9, is now trading $36 with expectations of a further decline. However, despite a 46% correction in oil prices, the shares of Bharat Petroleum (BPCL), Hindustan Petroleum (HPCL) and Indian Oil (IOC) jumped only 6-8%. Analysts believe it is partly because the stocks of OMCs have already factored in the positives and are trading at rich valuations.
The decline in crude prices, oil and gas reforms as diesel price deregulation and direct subsidy transfer for LPG, demand revival, improvement in refining and marketing margins and declining working capital requirements all have led the OMC stocks rising 2 to 4 times in past two years.
It is only IOC that has lagged its peers -- BPCL and HPCL -- because it recently commissioned its new refinery at Paradip. Since a newly commissioned refinery takes about a year to stabilise and also during this period the costs remain high, IOC earnings still have some headroom to grow and analysts see some more upside for the stock.
Analysts at Barclays say, "We stay underweight on BPCL and HPCL, but find valuations less stretched and expectations more modest for the larger IOC, rating it overweight."
For BPCL, which comparatively also has a play in exploration and production (E&P) segment, a low crude price scenario has led to relatively lower valuations for this business. However, success in E&P activities can act as a trigger or if oil prices rebound.
Another factor limiting upsides in the stock prices of OMC is their ambitious investment plans, which they announced recently. These plans will partly negate the benefits arising out of lower working capital requirements.
Nitin Tiwari at Antique Stock Broking says OMCs are getting into expansion phase, leading to significant capital expenditure over the next three-to-four years. While BPCL plans to spend Rs 100,000 crore over the next five years, HPCL has planned a capex of Rs 45,000 crore. The increased expenditure will mean increased borrowing and hence higher interest outgo.
Tiwari estimates total borrowing for BPCL and HPCL to increase to Rs 24,000 crore and Rs 30,000 crore by FY18 from Rs 11,700 crore and Rs 17,100 crore in FY15, respectively, largely on account of capex-related long-term debt.