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2QFY05 for Energy: A preview

Oct 12, 2004

The last quarter has witnessed some major initiatives being taken by the petroleum ministry in the face of high crude oil prices and the freeze on petroleum product prices during 1QFY05. To put things in perspective, crude oil prices have jumped by more than 50% to over US$ 45 per barrel (Indian mix) as compared to FY04 average prices of US$ 29 per barrel. The last quarter has witnessed some major initiatives being taken by the petroleum ministry in the face of high crude oil prices and the freeze on petroleum product prices during 1QFY05. To put things in perspective, crude oil prices have jumped by more than 50% to over US$ 45 per barrel (Indian mix) as compared to FY04 average prices of US$ 29 per barrel. Given this backdrop and the results season round the corner, let us take a look at the performance of the oil companies across the business straddle ranging from the upstream exploration to marketing and refining segments.

What are the major happenings that affected the energy sector during 2QFY05?

  • Rising crude prices

  • Change in the Government and policies

  • State-elections.

Let us have a look at the impact that the above factors are likely to have across the sector:

Upstream companies:

ONGC: ONGC, being into exploration and production of oil and gas is likely to witness strong realizations on the back of high oil prices. To put things in perspective, crude oil, which averaged US$ 29 per barrel in FY04, is currently over US$ 45 per barrel (Indian mix) and ONGC's realizations are likely to be nearly US$ 42 per barrel (considering that the oil major had provided discounts of nearly US$ 3 per barrel in 1QFY05). Every hike of US$ 1 per barrel of crude adds Rs 2.5 bn to ONGC's revenues during the quarter and to put things in perspective, crude prices have increased by over US$ 10 per barrel in the current rise.

Downstream companies:

BPCL: The current spike in crude oil prices is likely to result in a sharp decline in profits in 2QFY05. This is on account of the fact that oil-marketing companies have been selling petrol and diesel at below costs in some areas. Although the government announced duty cuts during the quarter, the same will not be sufficient to compensate for the high product prices at the refinery gate, resulting in an acute squeeze in marketing margins. Having said that, BPCL (also HPCL and IOC) is an integrated major having its own refining capacity. Thus to that extent the refining margins will compensate to an extent the loss in marketing margins, however the impact is likely to be adverse.

Further, with state elections round the corner, the government has withdrawn the 10% pricing autonomy to the oil companies and has maintained a freeze on pricing. This is likely to have a negative impact on the oil marketing companies, especially in the case of IBP, which has no refining capacity as such.

Duty structure
Customs duty old (%) new (%)
crude oil 10 10
petrol 20 15
diesel 20 15
LPG 10 5
Kerosene 10 5
Excise duty old (%) new (%)
Petrol 26 23
Diesel 11 8
Kerosene 16 12

Stand-alone refineries:

Chennai Petroleum Corporation: CPCL has been a major out performer as is evident from the above price graph. The company recently upgraded its refinery and has also reduced its interest burden, which is likely to help the company going forward. This is likely to help the company control its raw material prices. Crude prices are usually a pass through for refineries and as such, it usually does not have a major impact on these companies. However, the current high international product prices are likely to result in strong refining margins for the company. To put things in perspective, parent IOC is expecting refinery margins to touch an all time high of US$ 11 per barrel in the current quarter.

The above analysis is with a view to enable the investor to read into the current prices of the stocks and what are the factors that could impact the same going forward. The September quarter has been rather eventful for energy companies in the country and rising crude prices are likely to impact the financial performance of these companies in different ways as highlighted by the article above. Investors need to realise that while in the short-term, uncertainties regarding crude and product pricing are likely to sustain, the sector is likely to grow more or less in line with the growth of the economy.


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