Oil Stocks Outlook for the week – 25 to 29.05.2015

Oil Stocks Outlook for the week – 25 to 29.05.2015
 PSUs to track earnings, upstream companies positive
Stocks of state-owned oil companies will be in focus next week as all five of them are scheduled to report their Jan-Mar results in second half of the week. No surprise is likely in the performance of Indian Oil Corp Ltd, Bharat Petroleum Corp Ltd, Hindustan Petroleum Corp Ltd, Oil and Natural Gas Corp Ltd and Oil India Ltd as their performance usually depends on subsidy sharing and disbursal.

In the last quarter, the oil marketing companies usually report good profits as they are compensated for their entire pending revenue losses on subsidised fuels. For the upstream companies, the government has already said that ONGC and Oil India will not have to take the burden this time round. Trade in stocks of these companies may remain volatile in the first half of next week in line with the broad market, ahead of May futures expiry on Thursday. For ONGC, net profit is seen 10% higher on year at 53.8 bln rupees, while Oil India's bottomline may grow 51% to 8.5 bln rupees.

However, these two counters may trend up after ONGC confirmed that the government has already intimated a subsidy-sharing formula for Apr-Jun. Under the formula, ONGC and Oil India would not have to share loss on sale of subsidised fuels if crude price stays below $60/bbl on an average during the quarter. The two companies would bear 85% of the under-recovery on account of crude price exceeding $60 per bbl and 90% of the underrecovery on account of crude crossing $100 per bbl.

The move is a positive one as there was no clarity on the subsidy sharing so far, and it followed ad hoc decisions. Also the formula will ensure higher realisations for the upstream companies. IOC is expected to report net profit of around 46 bln rupees in Jan-Mar, down 51% on year while BPCL's bottomline may also decline 51% to around 20 bln rupees.

HPCL may witness a 73% decline in its Jan-Mar bottomline to 12.4 bln rupees. However, for oil companies, comparison with previous periods’ earnings is not meaningful due to inconsistent and unpredictable subsidy disbursement by the government. Operational parameters would be key and the refining margins of all three are expected to improve in Jan-Mar in line with trend.