Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.

Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Energy: What's the take? - Views on News from Equitymaster
  • E-MAIL
  • A  A  A
  • Aug 16, 2004

    Energy: What's the take?

    Indian energy sector is vulnerable to international oil prices (read crude), as the country is dependent on imports to the extent of 70% of domestic refining requirements. Although the world has witnessed many oil shocks earlier, most of them were supply-scarcity driven (i.e. wars), while the current one is largely a demand-pull activity. We believe, this high demand is likely to continue in the foreseeable future.

    Let us look at the impact the high crude prices have on the various segments of the Indian oil sector across the value chain (upstream and downstream).

    Upstream Downstream
    Parameters E & P * Integrated Refineries
    High crude prices A big positive, as companies sell crude at import parity prices. To put things in perspective, every US$ 1 increase in international crude prices lead to a Rs 9 bn addition to ONGC's revenues. Mixed impact. Although APM has been dismantled, government continues to control pricing resulting in the lack of ability to pass on high input prices to the consumers. However, the refining margins compensate for the squeeze in marketing margins. On the face of it, negative, as raw material costs increase. However, the resultant increase in product prices lead to better margins.
    Duties Negative, as it forms a major portion of the cost, as part of drilling, surveys and royalties. As compared to global competitors, ONGC's payment of duties is one of the highest. Negative. Since the government subsidises LPG and kerosene, high duties are levied on petrol and diesel. To put things in perspective, at current international prices, cost of petrol per litre is nearly Rs 13, while it is sold at Rs 42 per litre in Mumbai. A big positive. Since India is product surplus, customs duties are levied so as to bring the product prices to international levels, thereby resulting in higher profits to refineries and a protection against imports.
    Pricing Although in line with international prices, the government has roped in these upstream majors like ONGC and GAIL to share a part of the burden of subsidies on LPG and kerosene. Therefore, negative. Limited autonomy (within a 10% band). However, as on date, the 10% band has already been breached. Positive, as prices at the refinery gate are in line with the international prices. As such, high demand has pushed product prices higher resulting in robust profits for refineries.

    * Exploration and Production

    Upstream - ONGC, GAIL and Oil India
    Currently, crude oil (Indian mix) prices are at record levels (nearly US$ 41 per barrel), which should lead to robust performance by the upstream major, ONGC, which accounts for nearly 90% of Indian crude production. However, subsidies to the tune of nearly US$ 3 per barrel on account of LPG and kerosene subdues overall profitability.

    Integrated players - BPCL, HPCL, IOC
    Oil refining and marketing companies have been on a refinery expansion spree, although the country is currently faced with surplus refining capacity (i.e. production higher than demand). The expansion is likely to give these companies better control over their produce and at the same time, enable them to ride on the high refining margins. Further, it is always good to reduce external dependence (mostly companies like BPCL and HPCL, purchase from other refineries in select markets due to the lack of capacity and logistics benefits). Just for instance, post the contract with Reliance's Jamnagar refinery, oil marketing PSUs have nearly halved their product offtake from the private player on account of higher refining capacity.

    Standalone players - Kochi Refineries, Chennai Petroleum, MRPL, Bongaigaon
    Standalone refineries are currently witnessing a dream-run with international product prices ruling at record high levels (US$ 6 to US$ 7 per barrel as against US$ 3 per barrel in FY04). This is a demand driven hike in prices and is expected to continue over the foreseeable future. We therefore believe that petroleum product prices at the refinery gate are likely to witness a further boost.

    Overall sector view...
    As per the government's recent announcement of the 10% price band, it was also decided upon to maintain a flexible duty regime, whereby, in case of a breach in the ceiling of the band, the customs duties on products would be cut. Although India does not import petroleum products like petrol and diesel (except LPG), customs duties are levied on these products to bring the prices at par with international levels, resulting in higher profits for the refineries. This is likely to have a negative impact on the refineries' profitability and would help maintain marketing margins for the marketing companies. Given this backdrop, we would advise investors to exercise caution till further clarity emerges on custom duty cuts. However, over the long-term, energy stocks are looking attractive due to the fact that demand remains inelastic at the margin, regardless of prices.



    Equitymaster requests your view! Post a comment on "Energy: What's the take?". Click here!


    More Views on News

    GAIL: A Good Show (Quarterly Results Update - Detailed)

    Mar 27, 2017

    GAIL (India) Ltd has announced results for the quarter ended December 2016. reported 9.4% year on year (YoY) decline in sales, while bottom-line grew 45.4% YoY.

    ONGC: Higher Realisations on Crude Support Performance (Quarterly Results Update - Detailed)

    Mar 17, 2017

    ONGC has announced results for the quarter ended December 2016. The company has reported 9.2 % year on year (YoY) growth in sales, while bottom-line grew 197% YoY.

    Oil India Ltd: A weak quarter (Quarterly Results Update - Detailed)

    Jan 24, 2017

    Oil India Limited announced results for the quarter ended September 2016. The company has reported an 6.5% and 7.8% Year on Year (YoY) decline in sales and net profit respectively during the quarter.

    GAIL: A Robust Quarter (Quarterly Results Update - Detailed)

    Dec 3, 2016

    GAIL (India) Ltd has announced results for the quarter ended September 2016. The company has reported 16 % year on year (YoY) decline in sales, while bottom-line grew 180% YoY.

    ONGC: Lower Write-offs Support Performance (Quarterly Results Update - Detailed)

    Nov 3, 2016

    ONGC has announced results for the quarter ended September 2016. The company has reported 10.3 % year on year (YoY) decline in sales, while bottom-line grew 6.3% YoY.

    More Views on News

    Most Popular

    A 'Backdoor' to Multibaggers: It's Like Investing in Asian Paints Ten Years Ago(The 5 Minute Wrapup)

    Aug 10, 2017

    Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.

    The Most Profitable Investment in the History of the World(Vivek Kaul's Diary)

    Aug 8, 2017

    'Yes, it looks like a bubble. And, yes, it's like buying a lottery ticket. But there's something happening that has never happened before. It's an evolutionary leap in money itself.'

    Should You Invest In Bharat-22 ETF? Know Here...(Outside View)

    Aug 8, 2017

    Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...

    Signs of Life in the India VIX(Daily Profit Hunter)

    Aug 12, 2017

    The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

    Bitcoin Continues Stellar Rise(Chart Of The Day)

    Aug 10, 2017

    Bitcoin hits an all-time high, is there more upside left?

    Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

    SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

    Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms


    Aug 21, 2017 03:37 PM