With clarity emerging on FY16 subsidy sharing, Goldman Sachs is upbeat on oil marketing companies (OMCs). The finance ministry on Wednesday communicated to the oil ministry that it will fully compensate oil marketing companies for Q4 under-recoveries of FY15.
The finance ministry has agreed to pay Rs 5300 crore for under-recoveries of OMCs, exempting upstream oil companies from sharing the burden.
Goldman Sachs expects another Rs 2,700 crore to come from the government towards direct transfer of LPG subsidy, taking the OMCs' total receipts to Rs 8,000 crore.
According to a CNBC-TV18 report on Wednesday, the government will be paying the entire FY16 LPG subsidy through direct transfer, and upstream oil companies will be exempt from the same. But upstream PSU oil companies will have to share the entire under-recovery associated with kerosene.
This scenario is in line with Goldman Sach's estimates for upstream companies, improving the cashflow visibility for OMCs as it forecasts no subsidy payment in Q4 for OIL/ONGC and the FY16 realization is further based in line with its estimate of USD 50/bbl. "We believe the above scenario would be modestly positive for OMCs as direct transfer of cash by the government would further reduce working capital requirements for OMCs, thus improving earnings and cashflow visibility. Currently OMCs are transferring cash to customer accounts, for which they are reimbursed by the government," the report adds.
It has a 'buy' rating on HPCL and IOCL, and a conviction list (CL)-'Buy' on BPCL.
Excerpts from the report:
1) Expect net realization for state-owned upstream companies to remain between USD 50-60 per bbl despite declining under-recoveries, driven by the brokerage house's range-bound Brent crude outlook.
2) The domestic gas price (based on the new gas formula) has declined from USD 5.6/mmbtu on net calorific value to USD 5.1/mmbtu (effective from April 1, 2015). Goldman Sachs expects domestic gas prices to further decline to USD 4.6/mmbtu from October 1, 2015 (as the formula-based pricing is revised every 6 months).
3) Continue to favor downstream over upstream given improving cashflow and returns as margins gradually improve post deregulation.
(Posted by Devika Ghosh)
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