Oil Stocks Outlook
for the week – 21 to 25.07.2014
Stocks of the state-owned oil
marketing companies are seen in a range with negative
bias next week, taking cues from the
way the Ukraine crisis develops and crude oil
prices. Crude oil prices inched up
yesterday after a Malaysia Airlines plane was shot
down in eastern Ukraine, killing all
295 on board, leading to an increase in fears that the
tension between Russia and the rest
of Europe, as well as the US, could threaten global
crude supplies.
The ongoing turmoil in Iraq could
further impact international oil prices, increasing
revenue losses of the state-owned oil
marketing companies -- Indian Oil Corp Ltd,
Bharat Petroleum Corp Ltd and
Hindustan Petroleum Corp Ltd -- on subsidised fuels. The
crude prices had started softening
recently giving a much-needed relief to these
companies and increasing hopes that
diesel would be deregulated soon.
However, sentiments have improved for
Oil and Natural Gas Corp and Oil India Ltd as
the oil ministry is proposing a lower
share of the subsidy burden for these companies.
We believe that as the government
seems to be serious about improving the financial
health of these companies and also
because it plans to raise funds by selling stocks of
ONGC, the chances of lower subsidy
share have improved.
The National Democratic Alliance
government has been tentative in embracing the
much-anticipated reforms. Yet these
are only a matter of time. As and when the reforms
on fuel and gas pricing are
implemented, it will likely reset earnings for all state-owned
firms.
ONGC, where we estimate EPS (earnings
per share) could double in an upside case, and
BPCL, where we believe superior core
downstream performance is under-appreciated
and E&P (exploration and
production) undervalued, remain our top picks into this
tailwind.
