Oil Stocks Outlook: Upstream cos' shares seen down next week

[B. Karthick]

Oil Stocks Outlook: Upstream cos' shares seen down next week
Saturday, Aug 9

Shares of upstream companies, especially private sector ones like
Reliance Industries and Cairn India, are likely to remain in the
negative zone next week on fear that the government may impose super
profit tax on oil production from fields awarded before 1999.
The prime minister-appointed high-powered committee, headed by
former Cabinet Secretary, B.K. Chaturvedi, is said to have recommended
windfall profit tax on crude oil production from fields that were
awarded to companies before the launch of New Exploration and
Licensing Policy.
The committee is believed to have suggested that state-run oil
producers like Oil and Natural Gas Corp, and Oil India should give up
all revenues beyond $75 per barrel, while private producers will have
to lose 50% of their incremental income.
This proposal, if accepted by the government, will have a severe
impact on Cairn India, which is already producing oil from Ravva
fields and will start production from Barmer fields next year, which
are both pre-NELP blocks.
Reliance Industries will also take a partial hit as it produces
oil from offshore Panna-Mukta-Tapti fields.
However, RIL will be spared from such tax from oil produced from
MA fields in its Krishna-Godavari's D6 Block, as it is an NELP block.
We feel public sector companies like ONGC are unlikely to get
impacted as it already shares the subsidy burden of state-run oil
retailers.
Even at record high crude oil prices, during Apr-Jun, ONGC's net
realisation from oil sales after factoring in subsidies, stood at
$69.14 a barrel.

RETAILING COS
Shares of state-run oil retailing companies like Indian Oil Corp,
Hindustan Petroleum Corp, and Bharat Petroleum Corp are likely to rise
because of receding crude oil prices.
Crude oil prices fell below $120 a barrel mark this week from an
all-time high of $147.27 on Jul 11.
Softening oil prices improves the sentiment of oil retailing
companies, as their revenue losses fall.
The other factor that could bring back interest in oil retailers
is the B.K. Chaturvedi committee's suggestion seeking monthly revision
in prices of petrol and diesel, in line with the global trend.
The committee also recommended 100% export parity pricing for
fixing consumer prices of petrol and diesel, which will help bring
down revenue losses.
However, we feel the government is unlikely to dismantle petrol
and diesel pricing mechanism, especially in an election year.

Following are this week's closing share prices, in rupees, of
leading oil companies on National Stock Exchange, compared with the
previous week:

Company Closing price Closing price
% Change
Aug 8 Aug
1

Oil and Natural Gas Corp 1,063.90 997.55
6.6
Indian Oil Corp 432.00
417.95 3.4
Bharat Petroleum Corp 316.45 335.25
-5.6
Hindustan Petroleum Corp 229.65 224.45
2.3
Reliance Industries 2,251.80
2,297.60 -2.0
Cairn India 232.95
239.85 -2.9

Nifty 4529.50
4413.55 2.6
Sensex 15167.82
14656.69 3.5

End

B.Karthick
Research Analyst.