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Archive for June 27th, 2011

The oil sector reveals a host of issues- dogging the sector as a whole.

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A sweeping glance through the oil sector reveals a host of issues that are dogging the sector as a whole and some company-specific issues which are acting as a drag on the respective stocks. The over-arching issue of the adhoc subsidy sharing mechanism is taking its toll on the PSU space. Crude prices of $ 110+/bbl threaten to complicate the scenario considerably. The recent move to arbitrarily increase the subsidy burden on the upstream sector to ~39% has severely impacted the stocks. With the finances of the PSU OMCs held hostage to grants by the Govt., it has become very difficult to estimate future performance.
On the other hand, falling output from the KG D6 block threatens to overturn the capacity utilization calculations of various gas pipeline operators which may result in adverse near term performance. The Cairn-Vedanta deal, which was announced 10 months ago, is proving to be a case of indecisiveness in policy-making at the highest levels with opposing pulls & pressures from all sides. The interim CAG audit report on KG D6, Rajasthan & PMT fields couldn’t have come at a worse time for a sector that is already battling a multitude of headwinds.
India’s east coast has immense hydrocarbon potential, but investors may not look at these possibilities if the current policy environment continues. Same is the case in the refining & marketing sector. The government’s policy on continuing with subsidies has skewed the market in favour of public sector undertakings (IOCL, BPCL, HPCL). Private fuel retailers have shut shop or put their retail outlets up for sale. Shut-down fuel stations with RIL or Shell logo are not uncommon along the highways.
We believe that the pure refining space within the oil sector is best positioned for a take-off, aided by strong fundamentals and availability of companies which are expanding their capacities at the most opportune time to capitalize on the refining cycle. With the sword of under recoveries NOT hanging over them, we believe MRPL & Essar Oil offer the best bets to play the refining theme.

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Written by Fundamental Side

June 27, 2011 at 6:31 pm