Oil Stocks Outlook for the week – 25 to 29.07.2016 (Cairn India eyed; PSU refiners seen positive)

Oil Stocks Outlook for the week – 25 to 29.07.2016
(Cairn India eyed; PSU refiners seen positive)

Stock of upstream player Cairn India would be in focus next week after the company and its parent
Vedanta Ltd announced revised and final terms of merger in a bid to sweeten the deal for minority
shareholders of Cairn India.

Apart from getting one equity share in the merged entity, Cairn India's minority shareholders will also
get four redeemable preference shares of 10-rupee face value "with a coupon of 7.5% and tenure of 18 months from issuance". This has an implied premium of 20% to one-month volume-weighted average price of the Cairn India share. Vedanta had earlier offered one equity share and one preference share in the merged entity for one share of Cairn India. The stock closed 8.5% higher yesterday, even as the announcement of the revised terms came after market hours. The news is expected to lend more positivity to the stock, at least in the initial sessions next week.

Stocks of state-owned oil refining companies--Indian Oil Corp Ltd, Bharat Petroleum Corp Ltd, and
Hindustan Petroleum Corp Ltd--are likely to remain range-bound, but with a bullish bias next week,
and may outperform the broad market.

OMC (oil marketing companies) stocks have rallied 15-26% over the past month. The positive mood
is attributable to a muted outlook for crude prices. The positive sentiment is also because of
expectations of strong Apr-Jun earnings for state-owned refiners on hopes of high inventory gains.

In the absence of any major sectoral trigger, the trend for downstream as well as upstream oil
companies over the next few sessions will be determined by the movement in crude oil prices, as well
as the broad market sentiment. Rising exports from Iran and Iraq, along with a bleaker view for world
economic growth, are likely to keep crude oil futures on local and global exchanges in the red next

Oil exports from Iran are currently around 2 mln barrels per day, and the country aims to reach an
eight-year high of 4 mln bpd by the end of the year. A rise in petrol inventory during the peak summer driving season in the US, despite a fall in crude oil inventories, has also brought back worries of a supply glut.

For upstream players such as Oil and Natural Gas Corp Ltd, Oil India Ltd, and Cairn India, a rise in
crude oil prices will have a negative impact, as these entities produce and sell the commodity. Stocks
of the three oil marketing companies are already in the overbought zone but there are no signs of a
correction yet and the rally might continue in the immediate-to-near term.

Fluctuation in the dollar-rupee exchange rate is also likely to affect stocks of downstream and
upstream oil companies. If the dollar strengthens against the rupee, it will hit refining companies and
benefit upstream players. A weak dollar, on other hand, will help downstream companies, as India

primarily relies on imported crude oil to meet its requirements.