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
week.
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.
