Fitch sees -ve overhang in Indian oil & gas downstream biz

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Fitch Ratings has today said, in a just published Special Report, that the upstream sector (i.e. exploration & production, or E&P) of India's Oil & Gas industry has a stable outlook but the outlook on the downstream business (i.e. refining & marketing, or R&M) is negative to stable; the negative outlook applies to public sector companies (PSCs), while the stable outlook is for private sector entities.

"While the outlook on the downstream PSCs has improved from H208, the negative overhang remains as net under-recoveries have accumulated again in FY10," said Abhinav Goel, Director with Fitch Ratings India. "The discretionary nature of oil product pricing and subsidy sharing, along with the lack of a well-defined mechanism for timely support are key reasons for the continued negative outlook on the PSC downstream sector," added Mr. Goel.

The government has set up an expert committee in FY10 to advise on domestic fuel pricing issues, which has yet to submit its report. "Although a positive step, this is not likely to yield any meaningful results unless the major recommendations are implemented," Mr. Goel noted. Such committees have been established before, with few major price-related recommendations being implemented.

While the government has not allocated any oil bonds to date in FY10, it has recently confirmed increased budgetary support to downstream PSCs for the year. However, the agency notes that given the higher fiscal deficit of the government in FY10, the headroom for increased subsidy will likely be limited.

Fitch's global outlook for refiners remains weak in 2010. As of January 2010, eight out of 13 Fitch-rated refiners with international ratings have negative outlooks. Though key credit metrics are expected to improve, credit quality should remain weak and under pressure due to falling end-user demand, global overcapacity, and low utilisation rates. In India, this will have a greater effect on the private sector refiners as they have significant export revenues. However, the Indian private sector refiners are better off than many of their international peers due to their relatively efficient operations; Indian downstream PSCs, on the other hand, are more influenced by government action.

Fitch believes that the global credit quality of independent E&P companies during 2010 will remain below the highs of the recent past and should stabilise at 2009 levels. The agency also expects that inflationary expectations, combined with significant amounts of liquidity being injected into the global financial markets, will keep crude oil prices above the levels justified by the underlying supply and demand fundamentals.

Under the current structure, a large portion of production for the upstream sector in India is done by PSCs. The key reason for maintaining a stable outlook on these PSCs, while downstream PSCs have a negative outlook, is due to their more profitable operations and more conservatively financed balance sheets, despite the fact that they also have to share the subsidy burden.

The full report, "Indian Oil & Gas Outlook 2010: Improved, but Negative Overhang in Downstream Sector", is available on the Fitch Ratings website 'www.fitchratings.com'.