OREANDA-NEWS. January 17, 2012. Stocks of public sector oil marketing companies — Bharat Petroleum (BPCL), Hind-ustan Petroleum (HPCL) and Indian Oil (IOC) — have gained much more than the broader markets after hitting 12-month lows in the first week of January 2012. While trough valuations were partly responsible for the gains, expectations that the government would reimburse the remaining underrecoveries in a few weeks also helped.

Going ahead, too, analysts expect some developments that should boost their stocks. However, among the oil marketing companies (OMCs), they are savvier on BPCL. They believe the expected reimbursement of subsidy by the government — a lower share of burden for OMCs —— and a likely increase in fuel prices are good news for the sector, while BPCL stands out due to its strong exploration and production (E&P) resources petrochemicals foray.

Further, Niraj Mansingka of Edelweiss Securities, in his report, observes that he prefers BPCL to HPCL. Though HPCL has a higher leverage to correction in crude oil prices, its low return capex (Euro IV) is yet to be completed. Overall, nearly 86 per cent of the analysts have a buy rating on the stock, according to Bloomberg data.

Underrecoveries rising, analysts differ

As the rupee continues to remain weak vis-a-vis the dollar and crude oil prices remain firm, the underrecoveries (the difference between selling price and cost price of fuels) are on a rise. Most analysts now peg the total underrecoveries to touch Rs 1,40,000 crore.

However, a majority of analysts feel the share of subsidy burden will be higher on the upstream (oil producing) companies. Compared to 39 per cent last year, it may go up to 40-54 per cent. While OMCs are expected to be in a better position, analysts differ on their share.

Analysts at Enam observe in their report that OMCs may bear at least Rs 4,000 crore of underrecoveries and it is the upstream companies that will have to share 54 per cent of the burden (Rs 76,000 crore), as the government may not share more than Rs 60,000 crore in view of a higher fiscal deficit.

On the other hand, CRISIL, in a recent report, pegging underrecoveries for 2011-12 at Rs 1,40,000 crore, said the government would pool in 50 per cent, upstream companies 40 per cent and downstream (OMC’s) 10 per cent. This works out to Rs 14,000 crore.

But, irrespective of their share, OMCs are most likely to end the current financial year with a profit. They reported a combined loss of Rs 23,440 crore in the first half of 2011-12, compared to a net profit of Rs 2,531 crore in the same period a year ago. BPCL, which reported a loss of Rs 5,791 crore in the first half of 2011-12 (the lowest among OMCs), had reported a profit of Rs 424 crore in the period the previous year.

Asian Market Securities’ Arindam Pal adds that downstream companies will not be allowed to go in the red (they have reported profits for 15 years, even during tough periods) as that will have an adverse impact on crude oil imports. So, they are likely to bear underrecoveries only to the extent they they don’t slip in the red.

The other good news is that the reimbursement of pending compensation for the first half is expected in a few weeks. In spite of the government committing to reimburse Rs 30,000 crore of underrecoveries for the first half, it had released only Rs 8,000 crore till December 2011. This delay has considerably pushed the debt levels (25-39 per cent since the end of 2010-11 according to analysts at Antique) of OMCs in order to fund their working capital requirements. Hence, the move will help OMCs reduce their year-to-date losses and debt.