Exploring the energy dynamics - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks

MEMBER'S LOGINX

     
Login Failure
   
     
   
     
 
 
 
(Please do not use this option on a public machine)
 
     
 
 
 
  Sign Up | Forgot Password?  

Exploring the energy dynamics

Jan 27, 2005

The oil and gas sector has witnessed a lot of activity during the current fiscal as a result of recent surge in crude oil prices and its implications across various segments in the sector such as upstream exploration and production, integrated downstream majors and standalone refineries. Given this background, we had recently polled our readers for their view regarding the sector. Response to the poll

We asked our readers as to companies related to which segment of the energy sector would outperform from a medium term perspective and the largest proportion of the participants (63%) voted in favour of the upstream oil and gas exploration segment. While 15% of the voters were in favour of the oil marketing companies, the balance preferred to stick with the standalone refineries.

Our view

Companies from across the energy sector have under performed the Sensex over the last one-month (see table below). However, in the current scenario, let us have a look at the various segments of the business and the likely impact of high crude prices over the medium term.

Energy stocks: Underperformers!
24-Dec-04 24-Jan-05 change
Kochi Refineries 233.0 174.3 -25.2%
IOC 512.0 438.3 -14.4%
IBP 605.0 533.7 -11.8%
BPCL 438.5 389.5 -11.2%
HPCL 375.0 337.5 -10.0%
GAIL 237.0 214.8 -9.4%
CPCL 229.8 213.7 -7.0%
ONGC 841.0 782.5 -7.0%
BSE-Sensex 6,463.2 6,163.0 -4.6%
  1. Oil/Gas exploration: The country imports nearly 70% of its crude oil requirements. Given this backdrop, the government is pushing ONGC to acquire oil equity abroad. The company is likely to begin receiving oil and gas from its major investment in Russia, while other fields are likely to enhance production. High crude oil prices are likely to help the company reap rich benefits as every US$ 1 hike in oil prices lead to a Rs 9 bn addition in ONGC's revenues. The government is also reviewing gas prices and has given indications of price hike, which would help upstream companies reduce subsidies. As a result, and in line with the proportion of votes polled, we believe that the upstream segment is likely to outperform over the medium term.

  2. Oil marketing: During FY05, the oil marketing companies witnessed marketing losses as a result of product price freeze. However, recent decisions regarding price hikes and duty cuts have helped the marketing companies to improve margins. In the wake of high product prices at the refinery gate, the government increased retail prices of petrol, diesel and LPG, which helped recoup some losses. The government is also committed to doing away with subsidies on LPG, and this is likely to reduce the subsidy losses borne largely by these companies. We believe that the refining capacity expansion by these companies would help improve margins, as the refining margins would help compensate for any squeeze in the marketing margins. As a result, we believe that the companies from this segment are likely to be the next best on the performers' list.

  3. Standalone refineries: Companies from this segment have witnessed record refining margins on the back of firm product prices in the international markets. In other words, refineries realize import parity prices (international product prices + customs duties) at the refinery gate. On the back of freeze on retail prices during 1HFY05, the government reduced customs duties, which led to lower refining margins. Going forward, the government is contemplating further cuts in duties to ease the pressure on the marketing companies as a result of which, refining margins are likely to reduce.

Conclusion

Our advice to investors at the current juncture would be to have a cautious approach towards refinery stocks, although valuations at the current juncture look cheap. On the other hand, from a medium to long-term perspective, marketing companies do look attractive, given that private competition is likely to bring in more deregulation in the business. However, given the high dependence on crude oil imports and the pending gas price revision, we believe, oil and gas exploration companies are likely to emerge as clear winners.

Equitymaster requests your view! Post a comment on "Exploring the energy dynamics". Click here!

  

More Views on News

6 Popular Stocks that Turned into Penny Stocks (Views On News)

Nov 27, 2021

A look at popular stocks that crashed big time and never recovered, i.e. which went from 'Multibaggers to Multibeggers'.

ONGC to NMDC: Here are 5 Stocks Value Investors Should Closely Track (Views On News)

Nov 26, 2021

Before investing in value stocks, research the company and gain insight into why the market is discounting it.

Infosys vs TCS: Which is Better? (Views On News)

Nov 26, 2021

In the post pandemic era, the top two IT companies in India are fighting to capture the growing demand for IT.

Watch This Before You Buy NBFC Stocks (Fast Profits Daily)

Dec 3, 2021

My view on NBFC stocks.

Charlie Munger: This is "Even Crazier" than the Dotcom Era (Views On News)

Dec 3, 2021

Is the investing legend's pessimistic view on the stock markets justified?

More Views on News

Most Popular

Infosys vs TCS: Which is Better? (Views On News)

Nov 26, 2021

In the post pandemic era, the top two IT companies in India are fighting to capture the growing demand for IT.

This Multibagger Stock Zooms 20% After Dolly Khanna Buys Stake (Views On News)

Nov 24, 2021

Shares of this edible oil company zoomed over 50% in three days after ace investor bought around 1% stake.

6 Popular Stocks that Turned into Penny Stocks (Views On News)

Nov 27, 2021

A look at popular stocks that crashed big time and never recovered, i.e. which went from 'Multibaggers to Multibeggers'.

MobiKwik IPO Opens for Subscription Soon. Key Things to Know Before Subscribing. (Views On News)

Nov 20, 2021

The Rs 19 bn issue is set to hit the market soon.

5 Indian Companies Embracing Blockchain Technology (Views On News)

Nov 23, 2021

Blockchain adoption in India was slow in the past. Now, the technology is being well received.

More

Become A Smarter Investor
In Just 5 Minutes

Multibagger Stock Guide 2022
Get our special report Multibagger Stocks Guide (2022 Edition) Now!
We will never sell or rent your email id.
Please read our Terms

S&P BSE SENSEX


Dec 3, 2021 (Close)

MARKET STATS