May 21, 2013, 04.44 PM | Source: CNBC-TV18
Investors can prefer HPCL in short term and BPCL over long term among the oil marketing companies, advised Gagan Dixit of Quant Capital.
Gagan Dixit (more)
Analyst - Oil and Gas, Quant Global Research | Capital Expertise: Equity - Fundamental
Dixit said that declining diesel loses was primary reason for preferring HPCL over a short-term "They are already at below Rs 4 and I think after four-five months it would be more or less be at par with price that is required. HPCL's more than 50 percent of the EBITDA is coming from the marketing side. That would be the key beneficiary in the near term.”
BPCL, which holds stake in a Mozambique block is likely to benefit over the next two years as the operators of the block is likely to book substantial reserves in the next year.
Over the ongoing issue between finance ministry and oil ministry on export parity pricing for petroleum products Dixit said that if that is implemented then OMCs bottom-line would be affected by around Rs 80 billion. He feels that OMCs should be compensated for paying 2.5 percent custom duty on crude, because in export parity price model they will not get any such compensation.
For the last several months, the finance ministry has been demanding oil companies to move towards export parity away from trade parity. The proposal was rejected by the oil ministry on grounds that the OMCs would lose too much money and that their balance-sheets would be severely weakened.
Below is an edited transcript of the interview on CNBC-TV18.
Q: Did you get a chance to look at this report of export parity pricing and the kind of differential now the finance ministry and oil ministry have on what kind of compensation should be given for Q4 because we still haven’t got the final subsidy burden out for full year and there is still quite a bit of debate on how much more should the finance minister give. What is the call on this whole issue and going forward then it could lead to a de-rating of oil marketing companies (OMC)?
A: I think it is too early to comment on whether OMCs will get export parity or import parity price. I think Rangarajan committee is already working on it. Trade parity concept was formulated in 2006 based on the Rangarajan committee report. If the export parity pricing would be implemented then OMCs bottom-line would be affected to around Rs 80 billion. That is a significant number. That is my view. Otherwise basically OMCs should be compensated for shaping custom duty call because they are paying 2.5 percent custom duty on crude side also for import. In the export parity thing that would not be compensated for them, so that is the issue with OMCs.
Q: What’s your call about how the subsidy sharing will be for this fiscal year?
A: I think these upstream PSUs are already paying discount at around USD 50 per barrel for January to March quarter. Based on that, my call is that they would pay overall around Rs 600 billion of the subsidy, around 38-39 percent out of the total Rs 1,600 billion. Rest would be paid by the government for the remaining losses on the diesel, LPG and Kerosene. So that is for FY13. That’s my view. OMCs would be fully compensated for that. Only burden they have to basically indirectly pay for the higher interest cost because of the delay in payment or mismatch in payment of the announcement of the subsidy and actual cash payment to the OMCs.
Q: Within the OMCs, which would be your top picks because BPCL has been in a different league altogether. It of course has its own upstream assets as well but within all three names, what would be your top pick if any?
A: My top pick in the near term is HPCL. The primary reason is the declining diesel losses. They are already at below Rs 4 and I think after four-five months it would be more or less be at par with price that is required. HPCL’s more than 50 percent of the EBITDA is coming from the marketing side. That would be the key beneficiary in the near term. Yes definitely in the long term, if you talk about the one-two year time frame, BPCL offers additional advantage of the E&P thing, where next year I expect that Anadarko, the operator of the Mozambique block will book some substantial reserves in its balance sheet. So that would lead to some higher valuations for the Mozambique reserves and more clarity in approval of developments plans. Also, they are already working on some additional prospects that are identified. That has the further potential to unlock the value. So overall, my view is that still the game in not over from the Mozambique side. That’s why in the long term I am more positive on BPCL.
Q: Reports also suggest that the oil ministry moves a cabinet note to get hike gas prices to USD 6.7 per mmbtu. If that happens, what would be the impact, on which stocks and by how much?
A: If domestic gas prices are increased to USD 6.7 per mmbtu from current USD 4.2 per mmbtu then my calculation indicates that ONGC would get some Rs 50 per share benefit for its 18 trillion cubic feet (TCF) 2P reserves in its standalone books. Oil India also gets the similar value addition from that Rs 50. While if government raises from USD 4 to around USD 8-8.5 then ONGC and Oil India’s value would get improvement of around Rs 80 per share. That is just on the standalone basis that just if I see the sensitivity with the gas prices but I think that this gas prices thing would not be looked by the government on the standalone basis. It would be looked as the integrated approach for what should be the gas price and then subsequently what should be the subsidy burden on the upstream.
Q: What are your estimates for both Oil and Natural Gas Corporation (ONGC) and Oil India? Which stock would you prefer at current prices?
A: For ONGC my estimate is that its earning would be flat on Y-o-Y basis around Rs 49 billion. For Oil India it would be almost 2x increase of around Rs 8.6 billion. For Oil India it is more the impact of the base effect. In the last year same quarter there is the ad hoc increase in the Oil India's subsidy share among the upstream PSUs to around 12-13 percent from 10 percent for the previous 9 months, so that is why we have seen the subsequent jump in the Oil India's profit. Overall if I talk about the net crude realization, their net crude realization is expected to be something around USD 50-55, around USD 6-18/barrel Y-o-Y improvement for ONGC and Oil India. In terms of valuation, I prefer the ONGC, because I think that there are lots of triggers on the ONGC side. There is the benefit of the gas price hike thing and also they have the exposure for the ONGC Videsh (OVL) and they are already in some deals or other things globally. So if they are able to make any value-added deal that would unlock the value for ONGC. That is the relative advantage with ONGC that I see versus the Oil India.
Q: What is the call on Gas Authority of India (GAIL)?
A: GAIL is primarily the gas player. My view is that at least next three years is the painful time for the Indian gas utilities. Thing is that three years would be painful time from the supply side for the global Liquified Natural Gas (LNG). The spot LNG market would almost remain flat for the next three years. There is no growth in the overall spot LNG supply. Even in 2012 it has declined for the first time in past five years and next three years we expect 7 million tonne of spot LNG volume growth from the current 58 million tonne global LNG market. So, net impact is that GAIL will find it very tough to arrange the spot LNG cargos for next three years. So that might lead to hurt their spot LNG margins. They would also be impacted by the domestic gas price hike. Their petchem business might be impacted and around 15-20 percent EBIT would be impacted from that. So these are all the mix of things that can lead to lower marketing earnings and also lower transmission volumes because of declining KG-D6 production. I would prefer to avoid GAIL at this level.
Q: Did you look at that Petroleum and Natural Gas Regulatory Board (PNGRB) order on cutting the tariff for KG basin for transportation tariff? Do you foresee a one-time impact and if yes, how much impact do you see on the bottom-line?
A: As per my calculation one-time impact would be around some Rs 3/share something and reckoning impact should be around 60-70 paise/share. So overall around Rs 3-4/share impact on the GAIL's bottom-line because of this thing. The GAIL's volume is already very low, something around 7-8 mmscmd, so its impact would be very less. Their capacity is something like 15-16 mmscmd. If they are transmitting that level than impact would be very high, currently it is not more than Rs 5-10 overall impact on the valuation.
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