When you have stocks of some petroleum companies in your portfolio, you could be on slippery floor with crude oil prices surging past the $115 a barrel mark in March. It is a rise of forty five% since September 2010.
As a result, during the September 2010-March 2011, the stocks of oil advertising and marketing corporations (OMCs) and refining firms had been beaten down considerably, correcting within the range of 20-35% and 7-15%, respectively. Nevertheless, oil explorers, haven’t fared badly, hoping to cash in on the rising crude prices. Together with ONGC, Reliance Industries Ltd (RIL) and Oil India are among the many favourite stocks of analysts whom Cash At the moment contacted. (See Prime picks)
Market consultants see the outlook for stocks of oil refining companies getting worse as it is feared that crude costs will soon contact $a hundred and twenty a barrel on expectations of economic restoration within the developed nations, and continued political unrest in the Arab world.
So, what investment strategy must you comply with for the petroleum sector? Analysts say crude oil value shouldn’t be the only barometer used to take funding decisions. Dipen Shah, vice-president, non-public client group analysis, Kotak Securities says, “Earlier than shopping for oil stocks, buyers also needs to verify the global demand scenario, stock ranges, geopolitical issues and gross refining margins (GRM) of companies.” GRM is the distinction between the worth of petroleum products and price of crude.
R Murlikrishnan, head, institutional broking, Karvy Inventory Broking, adds to Shah’s criteria “You need to look at the enterprise model, international demand and the regulatory setting and see whether these have an effect on the earnings of the company you plan to spend money on.”
“Brent crude prices are expected to be in the range of $125-130 by the end of June.”
Senior Research Analyst, Bonanza Portfolio
OMCs equivalent to Indian Oil Company (IOC), Hindustan Petroleum Corporation Ltd (HPCL) and Bharat Petroleum Corporation Ltd (BPCL), which have been burdened by below-recoveries for decades now, aren’t allowed to extend the prices of petroleum products in proportion to the rise in costs of crude globally. This obviously hits the bottomlines of these corporations.
Based on a recent analysis report by IIFL, for the primary 9 months of 2010-eleven, gross underrecoveries for oil advertising companies have been Rs forty seven,000 crore primarily based on the crude oil value average of $eighty per barrel. Within the fourth quarter of the fiscal, crude oil costs averaged about $one hundred and one per barrel resulting in gross below-recoveries of about Rs 25,000 crore taking the overall to Rs seventy two,000 crore.
Between September 2010 and March 2011, the share price of HPCL slid 33.21% to Rs 356.Ninety five. BPCL and IOC fared a bit better and had been down 21.Fifty five% to Rs 611.30 and 21.14% to Rs 334.25, respectively, during the interval.
“The latest value correction is a confluence of unclear regulatory initiatives on the subsidy-sharing mechanism and the compensation to the OMCs. But in our view OMCs are trading at guide value and look attractive buys at this level in time,” Karvy’s Murlikrishnan provides. Taking a look at standalone refiners, quite a few of them are in bother because of the rising cost of crude oil.
If crude oil price corrects and subsidy burden gets lowered, the web realisation for the PSU exploration major ONGC could be higher. KG block basin appears to hold potential.
The increase in fuel worth to $four.2 per mmbtu is a giant positive for the government-owned oil exploration company because it improves its revenue and profitability.
The refining margins are anticipated to remain strong in the close to time period. In addition to, the alliance with BP will enhance the upstream activity of the biggest refiner in the nation.
In consequence, the inventory costs of Mangalore Refinery and Petrochemicals (MRPL) has declined sixteen% to Rs 64.35 and Chennai Petroleum Corporation (CPCL) has retreated 7% to Rs 223, within the last seven months.
Nevertheless, with the rise in GRM in the last quarter of 2010-11 to $6-7 per barrel, analysts anticipate refining firms to select up, “As a result of closure of refineries in Japan following the earthquake, demand for refining corporations in India has gone up. The refining margins have risen led by rising diesel spreads. Indian refiners are diesel-centric, hence, they stand to achieve the most from the leap in diesel spreads. We anticipate marginal price hike in diesel after the state assembly elections,” says Deepak Darisi, analyst with Mumbai-based mostly brokerage LKP Securities.
RIL, which has refining as well as oil and gas exploration operations, has overwhelmed the general downward trend and surged round 12% during September 2010-March 2011. “RIL is exporting their refined products at worldwide costs which results in better realisation. Therefore, the stock has performed higher than those of OMCs,” Dipen Shah adds.
Nevertheless, Darisi cautions, “The destructive news from KG-D6 that the manufacturing of natural gas goes down is performing as a dampener for the inventory.” In the first quarter of 2011, RIL dipped 0.6% to close at Rs 1,047.Eighty on the final day of March.
Among the major oil exploration firms, Cairn India’s share value rose round three% since September 2010 to shut at Rs 351.25 on March 31, 2011. “Cairn is the company with the highest leverage to crude oil worth. If you adored this post and you would certainly such as to receive more facts pertaining to Vegetable kindly check out our web site. Since crude oil prices have rallied, the corporate has carried out effectively. Nevertheless, present crude oil costs do not seem to be sustainable,” says Sarabjit Kour Nangra, vice-president, research, Angel Broking.
Public sector explorers, which are expected to share the subsidy burden with OMCs, however, had been shunned by Refinery Equipment manufacture shareholders. Oil and Natural Gas Corporation (ONGC) dropped about 13% since September 2010 to shut at Rs 290.10 on March 31, 2011. “The delay within the follow-on public supply (FPO) and uncertainty about the issue pricing led to the fall within the ONGC inventory value. Market fears that the problem could be priced at a low cost to the present market worth led to the decline.” says Mayur Matani, analyst, oil and gas, ICICI Securities.
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“High oil prices are good for non-public upstream players and refiners who don’t must bear the oil subsidy burden, they affect the downstream players (gasoline retailers) adversely as they should bear the subsidy burden for selling diesel, kerosene and LPG at government administered costs. Deregulation of diesel costs is unlikely to occur within the close to time period attributable to high inflation and upcoming state elections,” says Anil Chopra, chief govt officer, Bajaj Capital.”
However not all oil exploration companies have done well. Aban Offshore, Hindustan Oil Exploration Firm (HOEC), Jindal Drilling and Industries, and Oil India inventory costs declined round 21% to Rs 616.15, 15% to Rs 200.85, 22% to Rs 452.Ninety five and 10% to Rs 1,312.Eighty five, respectively, in the course of the period between September 2010 and March 2011.
Brent crude costs are expected to remain strong throughout the June quarter, specialists say. Basant Vaid, senior research analyst for commodities at Bonanza Portfolio says, “Costs are anticipated to be someplace in the vary of $125-130 by the tip of June. These larger worth ranges might be seen for fairly a while because the tensions in West Asia will not be prone to be resolved anywhere in the close to future. We could expect the crude costs to rise additional in the course of the second half of the yr on the same considerations that drove Brent crude prices to a two-and-a-half year high above $a hundred and twenty.”
“The close to-time period outlook for oil depends upon three components – occasions in the Center East and North Africa (MENA) area, quantitative easing in the US and incremental demand from China,” says Chopra.
“In our view oil advertising firms are buying and selling at e book worth and look attractive buys at this level in time.”
Head, Institutional Broking,
Karvy Stock Broking
The MENA crisis, however, seems to be essentially the most unpredictable because the second round of quantitative easing announced by the US Federal Reserve ought to expire by June 2011. There have been no alerts from the US government about a third round. Also, the incremental demand from China is anticipated to ease with the government’s makes an attempt to cool down the financial system with successive curiosity charge hikes.
As far as the basics of petroleum companies are involved, most have posted good numbers within the quarter ended December 31, 2010. HPCL posted a web revenue of Rs 211.03 crore, up 572%, in opposition to Rs 31.Forty crore within the corresponding quarter within the previous yr.
Amongst others, IOC, ONGC and RIL posted Rs 1,634.76 crore (up 132%), Rs 7,083.23 crore (up 132%) and Rs 5,136 crore (up 28%), respectively, as web profit, as towards the corresponding quarter within the previous year. On the sales entrance, HPCL has posted a 23% growth adopted by ONGC (up 21%), Oil India (up 17%) and IOC (up 16%).
Within the last quarter of the 2010-11, oil majors are expected to register good bottomline figures. “Oil India, ONGC and Cairn India are likely to report robust quarterly outcomes. The improvement in Singapore refining margins from $5.5 per barrel in the third quarter of 2010-11 to $7.4 per barrel within the fourth quarter would help RIL to increase its revenue yr-on-year in addition to quarter-on-quarter,” provides Mayur Matani.
Market experts imagine that this is the right time to invest in OMCs because the valuations are looking low-cost. “We consider in the second half of 2011-12, the government might enhance retail gas costs as inflation is expected to be lower. Hence, buyers can take a look at these stocks at the moment provided crude oil costs both appropriate or stay stable,” Kotak’s Dipen Shah added.