Government Interim Subsidy Share Mechanism To Benefit Indian Oil PSUs

By Mani
Updated on

The Indian government has reportedly approved an interim subsidy share mechanism which would benefit Indian public sector undertakings such as ONGC and OIL, notes a Morgan Stanley report.

Vinay Jaising of Morgan Stanley in his May 27, 2015 report titled: “Asia Pacific Oil & Gas” expects that  polyester/ aromatic netbacks will remain relatively low in the medium term amidst excess supplies.

Interim subsidy sharing mechanism effective F1Q16

Citing media reports (Hindu, Business Line, May 23), the Morgan Stanley analyst points out that the government has approved an interim subsidy share mechanism that will be applicable for F1Q16 (April to June 2015). Elaborating further on the media reports, he points out that the new formula envisages upstream companies paying no subsidy until $60/bbl and paying an 85% contribution if crude ranges between $60/bbl and $100/bbl, which increases to 90% if oil stays above $100/bbl.

However, the Morgan Stanley analysis suggests that ONGC and OIL’s net realization will vary between $60/bbl and $65/bbl assuming a Brent price of $60-110/bbl.

The analysis currently assumes net realization of $45/bbl in F2016 and $55/bbl in F2017 and assumes that net realization will increase to $60/bbl only in F2018.

Accordingly, Jaising believes that there could be material upside to near-term earnings for Indian PSUs if the interim subsidy share mechanism is continued for rest of the year.

Moreover, the Morgan Stanley analysis suggests diesel/petrol prices are unlikely to change materially in the next review, if Brent and INR/USD stays at their current levels until the end of this month. After factoring in the recent consecutive price hike, the analyst anticipates marketing margins at $0.8/litre for both petrol and diesel. He notes Brent prices have averaged ~$65/bbl in the current fortnight to date, while INR/USD has remained largely stable at ~63.7. He also assumes diesel margins at Rs 1.1/litre for 2016.

Jaising anticipates future price revisions will track trends in international price movements of these products, which should lead to higher confidence towards a market-determined price regime for these products in India.

Stable Brent oil prices

Jaising points out that Brent prices remained stable in the week ending May 22, 2015, closing at $65.1/bbl, ~$0.7/bbl lower than the previous week. The analyst notes the stability came amid the stronger US dollar and escalating tensions in the Middle East. He also notes an increasing supply could be a near-term risk, though the Morgan Stanley commodities team anticipates a modest recovery in crude oil prices into next year, and forecasts Brent prices to average $62/bbl in 2015 and $72/bbl in 2016.

Oil Stable Brent prices

Turning his focus towards refining, Jaising notes the average Singapore complex GRMs increased to $9.1/bbl, despite stable oil prices. He also points out GRMs remained at elevated levels through 1Q15, although maintenance activity was seasonally low.

Diesel, jet kero, fuel oil and naptha prices all moved in line with crude oil (Dubai) prices last week.

Oil Stable Singapore complex GRMs

The MS analyst highlights that the light-heavy spread remained constant at $3.55/bbl, almost $0.8/bbl lower than its long-term average of $4.2/bbl:

Oil Spread against Dubai

Tracking Asian oil and gas stock price performance, Jaising notes that Asian O&G stocks exhibited a mixed performance last week. He points out that though crude oil prices were stable, the majority of E&P players lagged the local market. The following table offers a summary of Asian O&G price performance:

Asian Oil and Gas-Price performance

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