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Business News/ Money / Pleasant surprise for upstream oil companies
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Pleasant surprise for upstream oil companies

Pleasant surprise for upstream oil companies

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While this will reduce the subsidy burden for upstream oil and gas companies, what got investors really excited is the oil secretary’s statement that subsidy burden for cooking fuels for this fiscal year would be borne entirely by the government.

Share prices of oil marketing companies such as Bharat Petroleum Corp. Ltd and Indian Oil Corp. Ltd were relatively muted, even though they too would be major beneficiaries of these decisions of the government. They would be fully compensated for the losses borne on marketing cooking fuels and may only have to bear part of the losses on cooking fuels (although this part is not clear).

The markets’ concern seems to be that in the event crude prices rise from current levels, the policy on subsidy sharing may be revisited and impact on oil marketing companies will be negative. Ahmed Raza Khan / Mint

The markets’ concern seems to be that in the event crude prices rise from current levels, the policy on subsidy sharing may be revisited and impact on oil marketing companies will be negative.

Upstream oil companies, on the other hand, gain when oil prices rise and even if the subsidy sharing policy is tweaked, they are still much better off compared with oil marketing companies.

In any case, even the valuation of upstream oil companies hasn’t risen at the same pace at which earnings estimates would have to be revised if the policy is adopted.

According to Citigroup Research, ONGC’s earnings per share would rise materially as a result of the government’s decision.

In fiscal 2010, it would amount to Rs135, assuming crude price at $65/barrel (Rs6,453) and no subsidy sharing for cooking fuels. If the subsidy burden is shared by the company and crude price is assumed at the same levels, the earnings per share estimate stands at Rs106, around 21.5% lower.

Based on Wednesday’s share price and the Rs106 estimate, ONGC traded at a price-earnings multiple of about 10 times.

While the company’s share price rose smartly on Thursday, its valuation has dropped to 8.3 times, based on the new earnings estimate.

The markets are evidently concerned about the flip-flop in government policy related to oil pricing.

Since the election results, shares of ONGC had outperformed the Nifty by around 10%, on hopes of a deregulation of pricing of auto fuels. While this hasn’t yet happened, the government’s twin moves to raise auto fuel prices and bear the entire losses on sales of cooking fuels have brought some long-awaited cheer to the company’s investors.

Write to us at marktomarket@livemint.com

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Published: 02 Jul 2009, 11:32 PM IST
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