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Oil & Gas: Securing the future - Views on News from Equitymaster
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  • Apr 5, 2003

    Oil & Gas: Securing the future

    FY03 started with the dismantling of APM for oil and gas sector. That meant technically the oil companies got the freedom to set their retail prices in line with international crude oil prices. Prices of petroleum products are since revised every fortnightly post APM, but the government is still playing a role in fixing the prices.

    One of the most significant changes witnessed post dismantling of the APM has been each company's drive to give itself a unique identity. So one can see the petroleum refineries, especially PSUs, touching up their retail outlets and making their petrol selling stations more attractive by providing different allied services like ATMs, shopping malls, etc. Also, there has been a new trend of branding a commodity like motor spirit by different players. However, no private participation is seen as yet in the retail refining and marketing (R&M) industry. It is expected that Reliance is going to start their petrol stations in the near future, but then it may be waiting with baited breath to acquire management stake in HPCL. This will further drive the competition in the future. The APM dismantling has thus increased competition on the marketing front.

    Gainers list
    (Rs) 26-Mar-02 26-Mar-03 % CHANGE 52 wk H/L
    BSE Sensex 3,466 3,144 -9.3% 3,566 / 2,828
    S&P CNX Nifty 1,123 1,011 -10.0% 1,153 / 920
    Bongaigaon Refinery 8 14 73.9% 25 / 7
    ONGC 258 355 37.4% 406 / 257
    IOC 196 235 20.1% 265 / 186
    HPCL 290 300 3.4% 330 / 167
    Castrol 188 190 1.0% 238 / 177

    The oil companies had to face losses to the tune of Rs 40 bn in FY03 on account of losses on sale of LPG and kerosene at subsidised rates. However, continuous alignment of retail prices to market levels for mass consumption products (petrol and diesel) helped offset these losses. The R&M companies had a strong year owing to healthy refining margins and inventory gains due to rising crude prices. Both HPCL and BPCL posted a 20% growth in topline during the first nine months of FY03. Increase in the turnover has been aided by an increase in sale volumes and robust increase in product prices during FY03. Aggregate volume growth seems to be driven by light distillates, petrol and LPG. Upturn in the automobile, commercial vehicles and two wheeler industry seems to have triggered higher consumption of petrol and diesel. Consequently, the bottomline recorded huge growth of about 148% for HPCL and 68% for BPCL.

    BPCL, HPCL combined
    (Rs m) 9mFY02 9mFY03 % change
    Net sales 565,973 679,842 20.1%
    Other Income 3,439 4,868 41.6%
    Expenditure 544,150 647,095 18.9%
    Operating Profit (EBDIT) 21,822 32,747 50.1%
    Operating Profit Margin (%) 3.9% 4.8%  
    Interest 4,499 3,348 -25.6%
    Depreciation 6,925 7,554 9.1%
    Profit before Tax 13,837 26,713 93.1%
    Extraordinary items -578 0  
    Tax 4,861 9,655 98.6%
    Profit after Tax/(Loss) 8,398 17,059 103.1%
    Net profit margin (%) 1.5% 2.5%  
    No. of Shares 638.8 638.8  
    Diluted Earnings per share* 17.5 35.6  
    P/E Ratio   7.4  

    IOC, India's largest refining company witnessed the highest ever crude oil throughput of 43.4 mmt during the FY03. The company's extensive pipeline network across the country increased to 7,030 kms from 6,523 kms in FY02. Also, the commissioning of major facilities added to IOC's financial performance in FY03. During the nine-month period ended December 2003, IOC reported a 3% topline growth, but backed by almost doubling of operating margins, the company finished with 147% net profit growth during the period.

    The year started on a positive note with stress on disinvestment of both BPCL and HPCL. Dismantling of the APM coupled with divestment news saw these stocks soar to new highs. But the process came to a standstill because the petroleum ministry seemed against any such move. Finally, a compromise was arrived at, with HPCL being offered on the divestment block and reduction of stake in BPCL through the IPO route. While BPCL stock fell sharply on this news, HPCL too suffered owing to the lack of clarity on the divestment timeframe.

    Losers list
    (Rs) 26-Mar-02 26-Mar-03 % CHANGE 52 wk H/L
    BPCL 317 224 -29.4% 351 / 168
    MRPL 8 8 -3.0% 13 / 6

    Recently, the Supreme Court has given the green signal for the divestment of these companies and many international oil majors have shown interest in the divestment programme. The government has planned the strategic sale of HPCL first and then it will divest its stake in BPCL through IPO route. Consequently, the stocks are again catching the interest of investors and it may be a landmark FY04 for both these companies.

    The Indian government has completed its third round of the government's new exploration and licensing policy (NELP III) in November. In this round, the government has awarded 23 oil and natural gas blocks to state-owned and private firms. Of this, 13 have been acquired by ONGC (9 on its own, 4 in consortium with either Oil India Limited or IOC) and 9 by Reliance. Till now the government has offered 70 blocks under 3 rounds of NELP. This initiative has been taken to entice the private sector participation in oil sector and to try and reduce India's oil dependence. One can already hear of Reliance, ONGC and some others striking natural gas reserves. The impact of these finds will be felt in the next few years.

    It was a very good year for Oil and Natural Gas Corporation (ONGC) on the bourses. The stock rose by around 37.4% as against 10% decline in the Nifty. ONGC reported a 68% jump in net profits for FY03 at Rs 104 bn. This mainly came from increased production which crossed 26 MMT mark of crude oil and 24.3 bcm of natural gas coupled with higher price realization for crude and value added products (because of deregulation of crude and product prices). The company has aggressively invested towards enhancing its oil recovery capabilities and exploitation of new oil reserves. It is targeting to double its oil reserves in the next twenty years. After the acquisition of MRPL, ONGC has become the first integrated oil and gas Company in India. ONGC achieved the distinction of becoming zero debt corporate by pre-paying the bulk of its foreign loans. Added to the domestic investments, its looking beyond Indian shores and has picked up stakes in Sudan Oil, Iran as well as some regions in the former USSR. All this bodes well for the country in the long term.

    On the macro front, the government had earlier planned to appoint an independent regulator once APM dismantling takes off. But it is currently continuing to regulate the oil and gas sector to a certain extent. In the future, it is expected that the government will appoint an independent regulator. This will ensure a level playing field to all the players in the market and avoid undue profiteering by oil companies.

    The lower customs duties on capital goods for LNG plants announced in the current budget will augur well for the sector, as it will lower the cost of setting up an LNG project. This will in the long run lower the prices of gas to the final consumer, as break-even point for these projects reduces. Given the Governments' thrust on reduction of dependence on crude oil in future, this is an incentive given to attract significant investments from private and public sector companies in the future. In effect, the sector has much to look forward to in FY04 and beyond.



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