The 2012-13 Budget has brought some bad news and also hope for some good news for India’s petroleum industry. The provision to raise cess on oil producers is clearly a negative for the industry. But the Budget does raise hopes of some long-term solution to the problem of under-recoveries and subsidies. How the government follows this up with firm action will decide the industry’s fate in 2012-13.
The increase in cess on oil produced from . 2,500 per tonne ($6.8 per barrel) to . 4,500 ($12.3 per barrel) is a body blow to the oil producers like ONGC, Oil India and Cairn India. ONGC, which alone produces 24.5 million tonnes of oil annually, is going to see its annual cess expenditure go up by . 4,600 crore. Oil India, which is nearing 4 million tonnes in annual crude oil production, will take a hit of . 700 crore. The Cairn-ONGC joint venture, which has been producing around 6.4 million tonnes per annum from the Rajasthan block, targets to reach 9-MTPA level by end-March. The increase in cess will add a burden of . 1,700 crore for the JV.
ONGC expects its crude oil production to move up from the current 27.3 million tonnes to 28.75 million tonnes in FY13 and 32 million tonnes in FY14. The Cairn-ONGC JV is expecting the production to touch 12.3 MTPA by end-2013. Higher cess payments will reduce the attractiveness of these production jumps. A number of brokerage houses have gone ahead and de-rated these companies. “We believe the increase in cess (keeping all the other variables constant) is likely to impact the upstream companies significantly with downward revision of over 10% in earnings for FY13E and FY14E,” mentioned a report by Centrum Capital, adding further, “We thus downgrade ONGC, OIL and Cairn from ‘Buy’ to ‘Hold’.”
“Driven by a significant impact on EPS due to cess revision, we are downgrading Cairn India from ‘Hold’ to ‘Reduce’. we are downgrading ONGC to ‘Hold’ from ‘Accumulate’. Similarly, we are revising our target price downwards for Oil India to . 1,218 per share from . 1,325, maintaining ‘Hold’ rating,” wrote IDBI Capital.
The Budget has also been gung-ho about cutting subsidy burden and reigning in fiscal deficit. The oil subsidy provision for FY13 at . 43,580 crore is 36% below the FY12 number. However, a major chunk of this provision will be used for the January-March 2012 quarter, leaving little for the next year.
“We note that in the Budget for FY12, the government had budgeted . 23,000 crore for oil subsidy, of which . 20,000 crore was a carry forward of its share for Q4FY11. Similarly, of the . 43,580 crore budgeted for FY13, we expect . 40,000 crore to be compensation for government’s share carried forward into FY13,” mentioned a report by Edelweiss.
Considering the . 45,000 crore already borne by the government for the first three quarters, this means the government’s share to touch . 85,000 crore for the whole FY12. When the total under-recoveries are expected to cross . 138,000 crore, the government’s total share will amount to 62% of the total. This will restrict the upstream companies’ burden at . 50,000-55,000 crore and that of retailing companies to a negligible level. Also, this will be necessary to ensure none of the oil marketing companies end the year in losses. This is a good news for companies for the year ending March 2012 which, however, will leave little subsidy provision for FY13. Lack of provisioning will imply a price hike.
“Based on our estimates, the budgeted oil subsidy of . 43,580 crore assumes increase in retail prices during FY13. If prices are not increased, it assumes international oil prices averaging $97 per barrel,” mentioned BRICS Securities in its Budget impact update report.
The oil marketing companies are losing around . 13.1 per litre on diesel sale, . 28.7 per litre on kerosene and . 439.50 per cylinder of LPG apart from over . 5.1 per litre on petrol. The total daily losses for the OMCs have risen to . 486 crore. If the industry was not investorfriendly pre-Budget, the situation has worsened post-Budget. While there is a visible negative impact on oil producers, the positive, if any, for retailers will take time to emerge as the government continues to seek support for fuel price hike. The economic fortunes of the entire industry continues to depend on the political mathematics in New Delhi.
The increase in cess on oil produced from . 2,500 per tonne ($6.8 per barrel) to . 4,500 ($12.3 per barrel) is a body blow to the oil producers like ONGC, Oil India and Cairn India. ONGC, which alone produces 24.5 million tonnes of oil annually, is going to see its annual cess expenditure go up by . 4,600 crore. Oil India, which is nearing 4 million tonnes in annual crude oil production, will take a hit of . 700 crore. The Cairn-ONGC joint venture, which has been producing around 6.4 million tonnes per annum from the Rajasthan block, targets to reach 9-MTPA level by end-March. The increase in cess will add a burden of . 1,700 crore for the JV.
ONGC expects its crude oil production to move up from the current 27.3 million tonnes to 28.75 million tonnes in FY13 and 32 million tonnes in FY14. The Cairn-ONGC JV is expecting the production to touch 12.3 MTPA by end-2013. Higher cess payments will reduce the attractiveness of these production jumps. A number of brokerage houses have gone ahead and de-rated these companies. “We believe the increase in cess (keeping all the other variables constant) is likely to impact the upstream companies significantly with downward revision of over 10% in earnings for FY13E and FY14E,” mentioned a report by Centrum Capital, adding further, “We thus downgrade ONGC, OIL and Cairn from ‘Buy’ to ‘Hold’.”
“Driven by a significant impact on EPS due to cess revision, we are downgrading Cairn India from ‘Hold’ to ‘Reduce’. we are downgrading ONGC to ‘Hold’ from ‘Accumulate’. Similarly, we are revising our target price downwards for Oil India to . 1,218 per share from . 1,325, maintaining ‘Hold’ rating,” wrote IDBI Capital.
The Budget has also been gung-ho about cutting subsidy burden and reigning in fiscal deficit. The oil subsidy provision for FY13 at . 43,580 crore is 36% below the FY12 number. However, a major chunk of this provision will be used for the January-March 2012 quarter, leaving little for the next year.
“We note that in the Budget for FY12, the government had budgeted . 23,000 crore for oil subsidy, of which . 20,000 crore was a carry forward of its share for Q4FY11. Similarly, of the . 43,580 crore budgeted for FY13, we expect . 40,000 crore to be compensation for government’s share carried forward into FY13,” mentioned a report by Edelweiss.
Considering the . 45,000 crore already borne by the government for the first three quarters, this means the government’s share to touch . 85,000 crore for the whole FY12. When the total under-recoveries are expected to cross . 138,000 crore, the government’s total share will amount to 62% of the total. This will restrict the upstream companies’ burden at . 50,000-55,000 crore and that of retailing companies to a negligible level. Also, this will be necessary to ensure none of the oil marketing companies end the year in losses. This is a good news for companies for the year ending March 2012 which, however, will leave little subsidy provision for FY13. Lack of provisioning will imply a price hike.
“Based on our estimates, the budgeted oil subsidy of . 43,580 crore assumes increase in retail prices during FY13. If prices are not increased, it assumes international oil prices averaging $97 per barrel,” mentioned BRICS Securities in its Budget impact update report.
The oil marketing companies are losing around . 13.1 per litre on diesel sale, . 28.7 per litre on kerosene and . 439.50 per cylinder of LPG apart from over . 5.1 per litre on petrol. The total daily losses for the OMCs have risen to . 486 crore. If the industry was not investorfriendly pre-Budget, the situation has worsened post-Budget. While there is a visible negative impact on oil producers, the positive, if any, for retailers will take time to emerge as the government continues to seek support for fuel price hike. The economic fortunes of the entire industry continues to depend on the political mathematics in New Delhi.
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