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Oil stock valuations tumble over policy hurdle - Views on News from Equitymaster
 
 
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  • May 25, 2000

    Oil stock valuations tumble over policy hurdle

    The intelligent investor might wonder why the market continues to offer a bargain; arenít markets supposed to be efficient. Refining stocks continue to trade near their 52 week lows (they rallied in the last week though). Perhaps there is a market compassion theory; market provides another opportunity to investors to recover from TMT explosions. More likely though, is that the market is unsure about Government divestment and the future path the sector will take.

    To hazard a guess; the Government currently proposes to completely deregulate the oil sector by 1st April 2002. It has already deregulated the exploration & production (E&P) and refining sector while the APM is still to be dismantled. The Government has signed production-sharing contracts under the New Exploration Licensing Policy (NELP). On further clarification of the policy one can expect the international majors to enter the up and downstream sectors as current crude prices are attractive to set up new E&P ventures and India remains one the fastest growing markets for refined oil.

    In this new scenario the PSU behemoths (IOC, BPCL, HPCL) will probably need to integrate vertically in order to withstand competition. Hence, consolidation in the sector looks very much on the cards. The government has decided to divest its stake in the stand-alone refineries to the behemoths. This does not amount to disinvestment as assets continue to be in Government control unless the Government divests from the behemoths.

    In the private sector a force also to reckon with might be Reliance should there be a merger between the Reliance companies in the oil and petrochemical sector. It will then be present on three levels of the value chain E&P, refining and petrochemicals. For marketing of its controlled products (diesel, petrol, ATF, naphtha and LPG) it has tied up with IOC and post 2002, IOC will market 52% of its output the remaining will be marketed under the Reliance & IOC JV. Hence, it will not require setting up of an independent marketing channel.

    Once the APM dismantling goes through, one can expect greater competition and consolidation in the refining sector. Those companies who are able to set up a retail distribution network will have an edge over the others.

    Better valuations in the sector might only materialise when the Government stops vacillating and gives strong indication of its plan of action.

     

     

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