Wednesday, November 20, 2013
Monday, November 18, 2013
Output, Subsidy Woes to Worry ONGC
The depreciation of the rupee helped ONGC, India’s biggest oil and gas explorer, post better-than-expected results in the September. quarte. The state-run explorer, however, continues to suffer from ad hoc subsidy sharing and stagnating production. Net profit at ONGC rose 2.8% yearon-year to . 6,064 crore, despite a 12% spurt in the subsidy burden to . 13,796 crore. This was made possible mainly by the more than 12% year-on-year depreciation in rupee during the quarter.
For every barrel of oil that ONGC sold, it recovered . 2,786 even after offering a $64.2 per barrel discount to oil marketing companies under a government diktat. This was 7.9% higher compared with the year-ago quarter. Being the biggest oil company, ONGC has to share the maximum subsidy burden.
While ONGC gave a subsidy of $64.2 per barrel during the quarter, Oil India offered $56 per barrel. It was also higher than the $62.9 per barrel discount it extended to downstream oil marketing companies in FY13 and $62.7 per barrel discount it offered in the quarter to June.
Although production has been lagging ONGC’s own expectations for some time, the September quarter did see some improvement in output. While crude production was stable at 5.1 million tonne, natural gas output was up 1.4% to 5.9 billion cubic metre.
The company’s depletion and depreciation expenses rose nearly 47% to . 2,427 crore, but a slow rise in rest of the costs led to a muted 11% growth in total expenditure. However, markets are likely to cheer the company’s ability to post a more than 50% growth in profits over the previous quarter. The positive sentiment, though, is likely to be short lived as the worry over ad hoc subsidy sharing still persists.
For every barrel of oil that ONGC sold, it recovered . 2,786 even after offering a $64.2 per barrel discount to oil marketing companies under a government diktat. This was 7.9% higher compared with the year-ago quarter. Being the biggest oil company, ONGC has to share the maximum subsidy burden.
While ONGC gave a subsidy of $64.2 per barrel during the quarter, Oil India offered $56 per barrel. It was also higher than the $62.9 per barrel discount it extended to downstream oil marketing companies in FY13 and $62.7 per barrel discount it offered in the quarter to June.
Although production has been lagging ONGC’s own expectations for some time, the September quarter did see some improvement in output. While crude production was stable at 5.1 million tonne, natural gas output was up 1.4% to 5.9 billion cubic metre.
The company’s depletion and depreciation expenses rose nearly 47% to . 2,427 crore, but a slow rise in rest of the costs led to a muted 11% growth in total expenditure. However, markets are likely to cheer the company’s ability to post a more than 50% growth in profits over the previous quarter. The positive sentiment, though, is likely to be short lived as the worry over ad hoc subsidy sharing still persists.
Subsidy Flow, Poll Season to Leave a Mark on OMCs
The three state-owned oil marketing companies (OMCs) appear to be in better health today, with the government having raised its subsidy payout in the quarter to September. This combined with steadily rising diesel prices and the government’s resolve to cut subsidy on diesel have prompted a few analysts to project a little more optimistic picture of the sector. Yet, the lack of flexibility on the fiscal front makes future subsidy payments uncertain, while any sharp rise in diesel prices will not be an option with national polls next year. This will mean a subdued outlook for the sector in the near term. For the September quarter, the government agreed to share over half of the under-recoveries estimated at . 35,150 crore.
This was substantially better when compared to the quarter to June this year, when the government chose to pay only 32% of the . 25,050 crore under-recoveries. This is certainly a good sign.
The three OMCs – IndianOil, BPCL and HPCL – also appear to have improved their balance sheets over the last one year.
Their combined net debt at the end of September this year was . 107,165 crore, 13.5% lower compared with a year ago. Net debt represents the total of long-term and short-term debt by deducting current investments, cash and bank balance as on date.
The government’s improved payment schedules during 2013 and steadily rising diesel price, which at one point limited under-recoveries on this largest consumed fuel to below . 4 per litre, helped these three companies in cutting down their working capital loans and improve balance sheets.
The oil marketing companies have not done anything spectacular over the last one year on the bourses. IOC and HPCL have lost between 23% and 28% in the last 12 months, while BPCL gained 4.5%. As a result, IOC and HPCL are now trading at 0.6-0.7 times their book value. BPCL commands a premium valuation thanks to its highly successful exploration portfolio, which is expected to bring in more profits than its traditional business from 2018 onwards.
A few market analysts are taking a view that these improvements signal light at the end of the tunnel and in view of very low valuations, are suggesting that investors should buy into these stocks for decent returns in the near term.
This view appears to be a bit premature. First, the government agreeing to compensate the OMCs does not necessarily mean timely disbursal of cash. In fact, the government has already exhausted its budgeted funding for petroleum subsidies in FY14, as close to . 40,000 crore of payments for FY13 were made this year. In view of the need to cut fiscal deficit to 4.8% of GDP in FY14 to ensure that the sovereign rating is not downgraded, there is a possibility that it will again postpone a chunk of current year’s subsidies to next year’s budget. This will mean that the oil marketing companies will report profits, but will need to again borrow heavily this time just like last year. The other way out will be to raise diesel prices sharply as suggested recently by the by Kirit Parikh committee and several others in the past. However, this appears unlikely in view of the general elections in mid-2014.
It is more likely status quo will be maintained for these OMCs, which will continue to report annual profits adequate enough to keep their heads above water, but will have to live on borrowed funds. This will put off long-term investors although there could be shortterm trading opportunities.
This was substantially better when compared to the quarter to June this year, when the government chose to pay only 32% of the . 25,050 crore under-recoveries. This is certainly a good sign.
The three OMCs – IndianOil, BPCL and HPCL – also appear to have improved their balance sheets over the last one year.
Their combined net debt at the end of September this year was . 107,165 crore, 13.5% lower compared with a year ago. Net debt represents the total of long-term and short-term debt by deducting current investments, cash and bank balance as on date.
The government’s improved payment schedules during 2013 and steadily rising diesel price, which at one point limited under-recoveries on this largest consumed fuel to below . 4 per litre, helped these three companies in cutting down their working capital loans and improve balance sheets.
The oil marketing companies have not done anything spectacular over the last one year on the bourses. IOC and HPCL have lost between 23% and 28% in the last 12 months, while BPCL gained 4.5%. As a result, IOC and HPCL are now trading at 0.6-0.7 times their book value. BPCL commands a premium valuation thanks to its highly successful exploration portfolio, which is expected to bring in more profits than its traditional business from 2018 onwards.
A few market analysts are taking a view that these improvements signal light at the end of the tunnel and in view of very low valuations, are suggesting that investors should buy into these stocks for decent returns in the near term.
This view appears to be a bit premature. First, the government agreeing to compensate the OMCs does not necessarily mean timely disbursal of cash. In fact, the government has already exhausted its budgeted funding for petroleum subsidies in FY14, as close to . 40,000 crore of payments for FY13 were made this year. In view of the need to cut fiscal deficit to 4.8% of GDP in FY14 to ensure that the sovereign rating is not downgraded, there is a possibility that it will again postpone a chunk of current year’s subsidies to next year’s budget. This will mean that the oil marketing companies will report profits, but will need to again borrow heavily this time just like last year. The other way out will be to raise diesel prices sharply as suggested recently by the by Kirit Parikh committee and several others in the past. However, this appears unlikely in view of the general elections in mid-2014.
It is more likely status quo will be maintained for these OMCs, which will continue to report annual profits adequate enough to keep their heads above water, but will have to live on borrowed funds. This will put off long-term investors although there could be shortterm trading opportunities.
Wednesday, November 13, 2013
India to Drive Global Oil Demand by 2020
By 2035, India will consume more oil than Japan, Australia and Korea combined, says IEA chief economist
India is set to become the biggest driver of global oil demand by year 2020,” claimed International Energy Agency’s chief economist Fatih Birol while speaking to ET on Tuesday. “Year 2020 is like tomorrow, from the oil industry’s point of view,” he said, underlining the urgency in his message on the sidelines of the publication of IEA’s World Energy Outlook 2013.
The Paris-based International Energy Agency (IEA) came out with its annual take on the energy industry’s outlook on Tuesday. Set up by the Organisation for Economic Cooperation and Development (OECD) as a response to the oil shock of 1973-74, IEA advises its 24 member countries on issues related to energy security. IEA’s well-researched monthly as well as annual reports on the energy industry are regarded as unbiased and referred by policy makers, industry as well as academia.IEA’s World Energy Outlook 2013 predicts the global oil demand to reach 101 million barrels per day (mbpd) by year 2035 from today’s around 87 mbpd. This is a significantly modest projection compared with 108.5 mbpd predicted by the Organisation of Petroleum Exporting Countries (Opec) in its World Oil Outlook published last week.
“There are various estimates available for future global demand, which differ based on the assumptions made,” Birol said. “One reason our estimate is lower maybe because we take into account the effect of current and likely energy efficiency policies by the governments, which will slow down consumption growth,” he reasoned.
The World Energy Outlook 2013 projects global coal consumption to grow 17% by year 2035 while the oil consumption is expected to grow nearly 16% from current levels. Natural gas consumption is expected to grow fastest mainly due to sharp growth in emerging economies such as China. While the high-paced growth in the shale gas and oil output will continue to transform the industry globally, conventional oil production is expected to stagnate to 65 mbpd.
“This does not mean the world is on the cusp of a new era of oil abundance,” cautions the report, which predicts a $128 per barrel price for crude oil till 2035, excluding any impact of inflation. Major oil industry investments during next 20 years will go in trying to maintain the output from existing oil fields. By 2035, transportation and petrochemicals will remain the only two demand drivers for oil. The size of India’s economy and growing population means the country will need more and more energy to continue its growth. Around a quarter of incremental oil demand globally will start coming from India alone post 2020. Similarly, by that time India will be world’s single largest importer of coal, according to IEA’s World Energy Outlook 2013.
“India’s oil consumption will exceed 8 mbpd by 2035, which is more than current consumption of Japan, Korea and Australia combined,” explained Birol.
India faces the challenge of ensuring access to affordable energy in the long-term while minimising the environmental impact.
“For a country like India, policies to improve energy efficiency are most necessary in transportation or electrical ppliances etc,” he added. According to him, India’s coal-based power plants have one of the lowest efficiencies in the world. “Making use of renewables, wherever economically feasible and increasing the share of natural gas,” were the two other measures he suggested. For a country like India, which has grossly neglected the health of its energy sector, thanks to unsustainable subsidies, this report should come as a wake up call. To sustain its economic growth and well being of the ever growing population, bold reforms are called for in the energy sector.
For a country like India policies to improve energy efficiency are most necessary in transportation or electrical appliances, etc. I also suggest making use of renewables, wherever economically feasible and increasing the share of natural gas
DR FATIH BIROL
Chief Economist, International Energy Agency
Oil India Likely to Gain if Gas Prices Rise Next Fiscal
Oil India’s financial performance in the quarter to September did not throw much of a surprise as a higher subsidy burden and an increase in depreciation and depletion cost eroded any benefits derived out of rupee depreciation. Profit, however, was better than in the preceding quarter, which boosted the company’s share price. Dry wells and depletion costs are key to any exploration and production firm, since other costs do not fluctuate much. For Oil India, this cost nearly doubled over the year-ago quarter to . 465 crore, its highest level so far. Similarly, subsidy burden for the quarter was 7.5% higher YoY to . 2,234 crore. The company’s oil and gas output has for long suffered stagnation because of agitations in the northeastern states, where it has most of its operations. Its oil production fell 4.6% to 0.92 million tonne while natural gas production declined 3.5% to 0.67 billion cubic meters during the quarter. Rupee depreciation, however, helped Oil India maintain its profitability at a decent level. The company’s average realisation at . 62.25 per US dollar in the quarter was nearly 12.7% better than the exchange rate of 55.2 in the year-ago period. This helped it achieve a net realisation price of . 3,257 per barrel of oil, which was 12% higher than the previous year. This aided Oil India in restricting the fall in its profit to just 5.3% year-onyear to . 903.6 crore.
The company is set to gain from the likely hike in gas prices in the next fiscal. However, there is also a possibility of a hike in its subsidy burden. Oil India is being valued at a priceto-earnings ratio of 8.6 with a dividend yield of 6.4%.
The company is set to gain from the likely hike in gas prices in the next fiscal. However, there is also a possibility of a hike in its subsidy burden. Oil India is being valued at a priceto-earnings ratio of 8.6 with a dividend yield of 6.4%.
Monday, November 4, 2013
Debt, Local Gas Price Hike Loom Over Gail
The 7% drop in Gail’s September quarter net profit was along expected lines. The slowdown in business and likely increase in natural gas prices from April next year remain key concerns for the transporter of thefuel,butthe government appears to be actively considering a move to exempt it from having to participate in the subsidy-sharing mechanism, which will help re-rate the stock despite current woes.
State-run Gail is required to pay a share of the subsidy that the government incurs on selling fuels at below cost.
The company has been trying to cope with the dwindling domestic availability of natural gas, which persisted in the September quarter, with volume dipping to 95.2 mmscmd (million standard cubic metres per day), down 4% from thepreceding quarter and 9.9% lower than in the year earlier.
However, this didn’t impact operating profit as EBIDTA, or earnings before interest, taxes, depreciation and amortisation, grew5% to . 1,463 crore, thanks to take-orpay arrangements with customers. This means that a contracted buyer needs to pick up supplies or pay a penalty.
The company has been investing heavily over the last few years in the expansion of its pipeline network, which has necessitated borrowings. Net debt shot up 47% at the end of September from a year ago, which resulted in a four-fold spurt in interest costs to . 108.2 crore in the quarter. This could prove another drag on earnings, since there may be a lag in capacity utilisation. The other hurdle it faces is the rise in prices of domestically-produced natural gas starting April 2014, which could dent margins in the petrochemicals and LPGbusinesses. It isestimated that the company’s overall costswould goup by around. 1,350-1,400 crore annually on this count. Gail’s subsidy-sharing burden may be limited to what it has paid out so far in the fiscal year — . 1,400 crore. This means earnings may rise in the second half, then slide once gas prices goup in April. Ifthe governmentexemptsthecompany permanently from sharing in the subsidy, Gail could be in for a rerating — not because of any substantial jump in FY15 earnings, but due to reduced uncertainty.
State-run Gail is required to pay a share of the subsidy that the government incurs on selling fuels at below cost.
The company has been trying to cope with the dwindling domestic availability of natural gas, which persisted in the September quarter, with volume dipping to 95.2 mmscmd (million standard cubic metres per day), down 4% from thepreceding quarter and 9.9% lower than in the year earlier.
However, this didn’t impact operating profit as EBIDTA, or earnings before interest, taxes, depreciation and amortisation, grew5% to . 1,463 crore, thanks to take-orpay arrangements with customers. This means that a contracted buyer needs to pick up supplies or pay a penalty.
The company has been investing heavily over the last few years in the expansion of its pipeline network, which has necessitated borrowings. Net debt shot up 47% at the end of September from a year ago, which resulted in a four-fold spurt in interest costs to . 108.2 crore in the quarter. This could prove another drag on earnings, since there may be a lag in capacity utilisation. The other hurdle it faces is the rise in prices of domestically-produced natural gas starting April 2014, which could dent margins in the petrochemicals and LPGbusinesses. It isestimated that the company’s overall costswould goup by around. 1,350-1,400 crore annually on this count. Gail’s subsidy-sharing burden may be limited to what it has paid out so far in the fiscal year — . 1,400 crore. This means earnings may rise in the second half, then slide once gas prices goup in April. Ifthe governmentexemptsthecompany permanently from sharing in the subsidy, Gail could be in for a rerating — not because of any substantial jump in FY15 earnings, but due to reduced uncertainty.
Monday, October 28, 2013
ESSAR OIL: Debt Remains a Worry Despite Improved Show
Essar Oil’s search for solace isn’t likely to end soon as its huge pile of debt continues to prove a drag on financial performance, even as the company is doing better operationally. September quarter numbers show a little improvement, but it needs to be seen whether this can be sustained. In other words, investors will need to be patient. With interest payments eroding earnings, what Essar Oil requires is either a sustainable spurt in operating cash flows or a restructuring of its debt burden. The company has been working on both these aspects for several months but it is taking much longer than earlier anticipated. Total net debt at the end of September was almost the same as it was six months before, but net worth — shareholders’ funds — stands eroded. Plans to raise dollar-denominated debt to repay that denominated in rupees to lower interest costs and extend the tenure also didn’t make much progress during the quarter. It converted loans worth just $50 million; it needs to raise an additional $1.4 billion. Nevertheless, the company’s ability to generate free cash flows could be improving, as it has put up a strong operating profit show, while interest costs appear to have softened. On a sequential basis, operating profit was up almost 45% to . 1,595 crore, while interest costs dipped 19% to . 766 crore. These two key trends need to be sustained. Foreign exchange losses of . 773 crore saw the company post another net loss in the September quarter. Gross refining margin (GRM), the differential between the price of refined products sold and the cost of crude oil needed to produce them, slipped to $6.93 per barrel from $7.86 in the year ago. The company is betting on improving GRM in coming months to ease its cash flow position further, while continuing to push for the conversion of rupee debt to dollar debt. The global outlook for the refining industry doesn’t appear rosy with capacities getting added while demand growth is muted. Essar Oil, therefore, needs to achieve the debt conversion goal at the earliest to relieve some of the pressure on earnings. Investors will have to wait till the company starts making sustainable profit.
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