BackLack of clarity hits oil marketeers’ stocks
Lack of clarity hits oil marketeers’ stocks
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Share prices of oil marketing companies (OMCs) Indian Oil Corp. Ltd, Hindustan Petroleum Corp. Ltd and Bharat Petroleum Corp. Ltd had jumped sharply on 25 June, the day when the Union government had de-regulated petrol prices, and increased diesel, kerosene and LPG (liquefied petroleum gas) prices. But since then, they have underperformed the BSE-100 index of the Bombay Stock Exchange by 12%, 11% and 4%, respectively.
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While the government had then talked about deregulating diesel prices, it hasn’t made any moves on that front. The reasons for this could be that oil prices have risen and inflation levels are already high.
OMCs stocks had peaked in September; but since then, investors have realized that the implementation of oil price deregulation would be tough. Thanks to the rise in oil prices, under-recoveries can be expected to be at relatively high levels.
Another overhang on OMCs is the lack of clarity on the subsidy-sharing mechanism. Subsidy sharing has been ad hoc in the past as well. So far, this year, there’s no clarity yet on how the burden would be shared.
On the refining front, analysts do not see much relief for OMCs. Refining margins are likely to remain under pressure on account of refining overcapacity and low demand in some markets.
According to analysts at Motilal Oswal Securities Ltd, “We expect the regional refining margin benchmark, the Reuters Singapore GRM (gross refining margin) to average $4/bbl (barrel) in FY11 and $4.5/bbl in FY12 against a five-year average of $5.5/bbl. We expect the refining margin to remain low due to (1) overcapacity in the refining business, (2) economic downturn leading to demand contraction/slowdown in the key consuming markets, and (3) increasing use of biofuels leading to lower gasoline (petrol) demand."
The fact that the earnings of these companies are highly correlated to refining margins implies that earnings would be under pressure for two reasons—higher under-recoveries and lower refining profits. It’s no wonder these companies’ stocks have underperformed.
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