GOLDEN RULES FOR TRADING

Oil Stocks Outlook for the week - 01 to 05.07.2013

www.rupeedesk.in

Stocks of state-owned upstream oil companies and Reliance Industries Ltd are seen upbeat next week backed by the announcement of a market-linked pricing mechanism for gas that is expected to significantly benefit these companies going forward. Stocks of state-owned refining and marketing companies like Indian Oil Corp, Bharat Petroleum Corp and Hindustan Petroleum Corp are likely to track the rupee-dollar movement and the broad market. The government decided, post market hours Thursday, to shift to a market-based pricing mechanism which may result in near doubling of gas prices to $8.4 per mBtu from the next financial year. Also, prices will be revised every quarter after that. Reliance Industries is seen one of the biggest beneficiaries of the move, as volumes are expected to rise from the company's KG-D6 block in around two years and a higher price may prod it to expedite production from other blocks as well. However, in the first year of implementation, ONGC is seen the biggest gainer. ONGC's earnings could improve by around 35%, while Oil India can witness an increase of 30% in 2014-15 (Apr-Mar).

Morgan Stanley believes that Reliance Industries' earnings will increase by around 20% in 2014-15. We highlight that the incremental EPS contribution for RIL from gas prices is higher in F2017 and beyond, when production is expected to increase. Goldman Sachs sees a further upside in gas prices in 2015-16 as the new formula has long-term LNG prices based on previous five years' average oil prices. The average is now being pulled down because of the very low crude oil prices of 2009-10. Once 2009-10 moves out of the calculation for the five-year average, the base price will improve. Beyond five years, we expect the gas market in India to be fully deregulated with market forces deciding gas prices. If the broad market remains buoyant, stocks of all the upstream companies Oil and Natural Gas Corp, Oil India Ltd and Reliance Industries will remain upbeat. Meanwhile, the gas pricing move also lifted the rupee from its historical lows and it ended yesterday above the psychologically important mark of 60 for a dollar. The Indian currency ended the day at 59.38 for a dollar, and any further recovery will result in gains for stocks of the oil marketing companies.