Outlook on Indian Oil and Gas sector for 2012: Fitch

19312 Investors following BPCL. Share this News with them.

0

Like this story, share it with millions of investors on M3

Outlook on Indian Oil and Gas sector for 2012: Fitch

Fitch Ratings has come out with its outlook on Indian Oil and Gas sector. The rating agency believes, the government will support OMCs to ensure they keep meeting their obligations in time.

Post your opinion here

 

0

Tweet

Share on Tumblr

BPCL BSE | NSE 01/06/12 Are Mutual Funds betting on BPCL? Other Stocks in this news Hindustan Petroleum Corporation |

Fitch Ratings has come out with its outlook on Indian Oil and Gas sector. The rating agency believes, the government will support OMCs to ensure they keep meeting their obligations in time.

Stable Despite Challenges: Fitch Ratings' Outlook on both public and private sector Indian oil and gas companies is Stable despite various challenges including increasing fuel subsidy burden on public sector companies (PSCs) and an uncertain global macroeconomic environment.

Strategic Importance to Government: Outlook on the Indian public sector oil and gas companies is Stable for 2012, based on Fitch's expectation of no weakening of the ties between the government and its majority-owned oil companies, which dominate the sector. The agency links the ratings of these companies with that of the sovereign because of the strategic importance of the sector and the evidence of tangible financial support. Consequently, these companies' Stable Outlooks reflect that of the sovereign.

Slow Reforms Increasing Subsidies: While high crude oil prices and a depreciating INR contributed to increased under-recoveries (caused where retail price is lower than market price), a lack of policy reforms still remains the key reason for the burgeoning under-recoveries. There is also a lack of policy reform to improve timeliness of subsidy transfer to public sector oil marketing companies (OMCs). Since Fitch does not expect much fuel-pricing reforms in 2012, under-recoveries will remain high unless crude oil reduces significantly or INR appreciates.

OMCs' Half-Yearly Results: All three public sector OMCs reported EBITDA losses in H112 (ended September 2011) due to increased under-recoveries. However, Fitch's ratings on these companies are based on its expectation of continued sovereign support to these companies, given their role as the government's extended arm for policy implementation, and consequently, these ratings are not likely to be affected.

Private Refining Sector: Refining margins are expected to soften from the 2011 levels as global demand growth slows and refining capacity is added. However, Outlook on the private sector companies is also Stable given Fitch's expectation of earnings and capital expenditure.

Overcapacity in Domestic Refining: India's surplus in refining capacity will increase with the commissioning of new facilities in the medium term. Public sector downstream companies benefit from subsidy support. The surplus refining capacity mostly lies in the private sector, which can export a significant part of the production on a sustained basis.

What Could Change the Outlook
Weakening of Government Link: The public sector OMCs could move to a Negative Outlook if their links with the government weaken. However, the risk of this happening is considered low.

Sovereign Outlook: Any change in the sovereign's rating Outlook will lead to a similar change in its majority-owned companies' Outlook.

Private Sector: Some private sector companies' Outlook could move to Negative if debt-funded capex steps up significantly, or earnings are significantly lower than projected, due to depressed global economic conditions.

Half-Yearly Results of OMCs
All public sector OMCs reported EBITDA losses in H112 despite accounting for Indian government subsidies of INR82bn by IOC, INR35.2bn by BPCL and INR32.7bn by HPCL . Fitch still maintains a stable Outlook on these companies based on its expectation of continued sovereign support to these companies, given their role as the government's extended arm for policy implementation. Continued support is evident from the government's additional subsidy grant of INR150bn to these companies after Q212 results.

FY09 recorded the highest gross under-recovery before FY12. Since these companies were facing the double whammy of higher gross under-recovery and inventory losses in FY09, the Indian government increased its financial support substantially to INR713bn (FY08: INR353bn) to ensure that net under-recoveries of OMCs was zero (though a large proportion of it was in the form of bonds), after which, the government of India moved to a system of cash subsidies, which in Fitch's opinion demonstrates a higher commitment despite net under-recoveries. In FY12 Fitch expects gross under-recoveries to exceed that of FY09; the Indian government already announced support of INR300bn for the OMCs, and the upstream contribution in H112 was INR216bn (FY09: INR320bn). Fitch believes the government will support OMCs to ensure they keep meeting their obligations in time.

Disclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

To read the full report click on the attachment