Why Q1 results won’t change sentiment for oil stocks2 min read . Updated: 12 Jul 2018, 10:33 AM IST
Should oil prices increase faster, fears about the burden of sharing fuel subsidy have emerged for these oil stocks
So far in 2018, barring shares of Reliance Industries Ltd (RIL), stocks of other oil firms have lagged the BSE 500 index by a wide margin. The RIL stock has increased 12.5%, beating the 1.2% decline in the BSE 500 index. On the other hand, stocks of state-run oil companies have declined in the range of 15-36%.
The upcoming June quarter results may not offer investors in state-owned oil firms any solace either. Blame strong crude oil prices for this.
Even as crude oil prices remained high, retail fuel prices were not raised adequately around the time of Karnataka elections. As a result, marketing margins of oil marketing companies (OMCs) are expected to decline on a quarter-on-quarter basis. OMCs include Bharat Petroleum Corp. Ltd, Hindustan Petroleum Corp. Ltd and Indian Oil Corp. Ltd. Plus, Singapore benchmark refining margins have declined year-on-year as well as sequentially. On the brighter side, higher crude prices could fetch some inventory gains for OMCs.
Still, that won’t be enough to move the needle as far as sentiments for OMC stocks is concerned. “We revise down marketing multiples for OMCs citing rising Brent fears and an election-heavy calendar", wrote analysts from Edelweiss Securities Ltd.
In short, fears that these companies won’t be able to pass on high crude prices to consumers will remain from a medium-term perspective given the election season. Outlook for producers—Oil and Natural Gas Corp. Ltd (ONGC) and Oil India Ltd—is clouded too. Sure, higher oil prices mean higher price realizations.
But, should oil prices increase faster, fears about the burden of sharing fuel subsidy emerge for these stocks. “The sharp correction in ONGC has been precipitated by concerns that the subsidy burden will outstrip benefits of oil price increase," pointed out Edelweiss in its earnings preview report. This is the reason these stocks haven’t performed well despite firm oil prices, although clarity on subsidy sharing should offer some relief.
For the June quarter, Kotak Institutional Equities expects Oil India and ONGC to report sequential increase in Ebitda driven by increase in domestic gas price, a weaker rupee against the dollar and lower operating costs.
This will be partially offset by lower net crude realization, which the brokerage assumes will be restricted to $55 a barrel based on its FY2019 subsidy sharing mechanism.
Ebitda is short for earnings before interest, tax, depreciation and amortization.
For RIL, the subdued muted refining margins last quarter is expected to be offset by higher volumes from its petrochemicals business. Telecom and retail businesses may boost consolidated earnings enough to take it 1% higher quarter-on-quarter at ₹ 9570 crore, reckon analysts from Jefferies India Pvt. Ltd.
“It would be a decent outcome under the circumstances," it added.