What does Budget spell for Oil and Gas sector? - Views on News from Equitymaster

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What does Budget spell for Oil and Gas sector?

Mar 20, 2012

The much awaited budget was finally announced last week, leaving many high and dry. One of the most disappointed sectors is Energy sector. Let us find out what it had to offer and what do the related companies take away from it.

The 'Cess' stress

The whole country is crying over the need of rationalizing fuel price taxes. The government, however, has chosen to lend a deaf ear. Forget the easing. The cess on crude has been increased by a whopping 80% from Rs 2500 per tonne to Rs 4500 per tonne. This increase of Rs 2000 per tonne will lead to a decline in realizations by over US$ 5 per barrel. Cess refers to the tax imposed on the production on crude from the pre NELP (New Exploration Licensing policy) blocks. While the increase in tax will increase revenues for the Government, it will have a negative impact on the net realizations on crude for oil producers like Oil and Natural Gas Corporation (ONGC), OIL and Cairn Energy. This will be like a double whammy for upstream oil sector that is already losing on net realizations due to compensation towards oil under recoveries (revenue losses due to price regulation of petroleum products in India).

Subsidy calculations destined to fail

Despite actual petroleum under recoveries consistently overshooting the budgeted estimates, the Government has allocated a paltry sum of around Rs 435.8 bn for FY13.Compare this with FY11 under recoveries worth Rs 780 bn and FY12 estimated under recoveries worth Rs 1,400 bn. With the threat of crude prices going even higher, we believe that it will be upstream companies facing the heat while downstream companies like Bharat Petroleum Corporation Limited (BPCL) and Hindustan Petroleum Corporation Limited (HPCL) will keep struggling for working capital needs.

Duty cut on gas - A positive more for power sector than gas companies

While the Government has fully exempted customs duty (from 5% to 0%) on natural gas and liquefied natural gas, it is hardly a balancing act as far as impact on gas companies is concerned since this privilege is available only in the case where imported gas is used for power generation. Nonetheless, companies like GAIL and Petronet LNG Limited (PLNG) will benefit due to increased gas demand from the power sector.

The feel good factors

The Government has decided to increase the viability gap funding for the sector .The various oil and gas / LNG (liquefied natural gas) storage facility and oil & gas pipelines have been made eligible for Viability Gap Funding . We believe the news is positive especially for companies like GAIL, Petronet LNG and Gujarat State Petronet Limited (GSPL). It will also bring investments into the oil and gas sector that seems to be suffering on account of stifling policies.

The budget speech suggests some steps being taken for direct transfer of subsidies. However, the actual implementation is full of challenges and will take a long time for pan India application.

To conclude...

We believe that the budget for oil and gas sector has brought more negatives than positives. While the negatives (cess) will have their impact very shortly, the positives (direct transfer of subsidy) will take much longer time to soothe the concerns of the sector.

Richa Agarwal

Richa Agarwal (Research Analyst), Managing Editor, Hidden Treasure has over 7 years of experience as an equity research analyst. She routinely scours the small cap universe for fundamentally strong companies trading at attractive prices. Having degrees in both finance as well as engineering has served her well in analysing business models across the small cap space.

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