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Posts Tagged ‘Crude oil

OIL India – going strong

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OIL India – going strong

Q2FY12 crude oil & natural gas production were record highs for the company.

Crude oil production rate has been increasing continuously and OIL is presently producing crude at a rate of 3.96 MMTPA (FY12 MoU target: 3.76 MMT). This is noteworthy as most of its production is coming from aging fields in the North East. There has been a steady growth in oil production since the last 3 years through induction of new technologies and accelerated exploration and drilling campaign. Q2 FY12 production rate is even higher than the FY13 MoU target of 3.91 MMT.

Gas production is set to increase at CAGR of 7.1% from FY11-13 driven by steady production from its NE & Rajasthan fields and monetization of contingent reserves. Gas supply to Numaligarh Refinery Ltd (NRL) would also be ramped up to 1 mmscmd. Revision in APM & non-APM gas prices after FY14 is expected to provide another jump to gas sales going forward.

We assume 39% of the gross subsidy burden to be borne by the upstream sector in perpetuity. Taking into account the fact that the upstream sector has shared 33% of the subsidy burden in H1 FY12, we expect the upstream sector to share 51% of the total under recoveries for H2 FY12. However, we expect OIL to post FY12 net realization of $ 67/bbl.

Oil India will also be holding a Board Meeting on Dec 20, 2011 to consider the declaration of Interim Dividend for FY12. As the company is holding a cash balance of Rs 136 bn as of Sept 2011 which translates into a whopping Rs 565/share, we expect a big dividend which will act as a trigger for the stock price.

We maintain our BUY rating with a target price of Rs 1,526.

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Written by Fundamental Side

December 16, 2011 at 12:41 pm

Gaining Pain versus Paining Gains

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When DXY Index broke below 73 in April 2011, the hope for a revival just got thinner as the world
rejoiced a weak USD against majority of currencies. After all it helps in minimizing the pain inflicted by
rising commodity prices.

When most of us expected FED Chief Ben Bernanke to raise interest rates like the ECB which did so in
April 2011, the FED kept the rates unchanged but signaled the end of Bond buying program by June
2011.

The question is, how long will the falling dollar to rising commodity prices equation last? For how long
will we continue to rejoice that rising crude oil prices won’t affect us that severely as the impact is
reduced due to the strong local currency against the US Dollar. Don’t forget that the same is not true
for Americans who are losing their edge due to weakening Dollar. Is it right to envisage that the FED will
continue to be a mute spectator for an extended period of time, as the same is being preached or fed to
the media in the speeches of Mr. Bernanke. The charts of US10YR bond yields are suggesting an end of
the bull market in US Bonds which have been in place for past 3 decades now. The exit of US Bonds and
treasuries by PIMCO add fuel to the possibility that the good times in US Bonds may be coming to an
end for the good given the stature of the PIMCO chief Mr. Bill Gross.

Either the downgrade by S&P will be proved correct which means US Dollar would depreciate further
against other currencies or the Dollar will rise from the ashes.

Last year around the same time or to be very precise on June 2, 2010, DXY Index was at 89 and Europe
had fallen of the cliff, today the scenario is inverse. Though dollar has fallen off the cliff, Europe isn’t out
of the woods yet.

We would accede to the thought of a bearish dollar once its breaches below the low of 71 formed in
April 2008 and not before. As a player who believes in investing through the principle of contrarian
opinion, a long position in USD could be a good idea if DXY Index falls to 72 areas and stops can be
placed at just below 71. It won’t be a surprise to see the investment generating positive alpha in the
next 24 months time.

US Dollar Index (Monthly)


Written by Dwaipayan Poddar

May 2, 2011 at 5:30 pm

Posted in Market Update

Tagged with , ,

Tight Lending Puts India’s Growth at Risk

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Earnings disappointment is a huge risk to the markets expectation from Indian companies.

Infosys may be the harbinger for not so good corporate news going forward.

Inflation, high interest rates, political challenges and one can continue the head winds that the Indian corporate will face going forward.

The crude oil prices are hovering well above the $100 mark, and with no indication of that cooling in the near term high Inflation would continue to worry the developing economies.

With the inflation numbers revised upwards from previous projection of 7% to 8% by the RBI, interest rates would continue to remain higher. In a regime of high interest rates the cost of credit for major Indian companies increases.

Also other factors such as political turmoil and other global challenges are getting tougher to grapple with.

FII Flows:

Even though flows into EM markets was positive, there is marginal outflow from India specific funds as reported by fund-tracker EPFR Global in the week ending April 13. So the picture from fund flows seems mixed.

Technical Picture:

The 5930 level on NIFTY has now become critical and today’s reversal keeps the bearishness of the market intact.

A break below 5730 will definitely open up test of the 5200 lows and potential break of that.

Only above 5950 and 6000 levels will we be comfortable that we are only in a range and not in a bear market.

Written by Sayanta Basu

April 21, 2011 at 4:38 pm

Posted in Market Watch

Tagged with , , , ,

“Crude” Reality

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Brent crude has consistently stayed above $ 110/bbl despite the disaster in Japan and it is safe to assume now that crude will continue to stay at such elevated levels as long as the unrest in the oil producing countries continues to simmer. The Libyan ruler Gaddafi continues to call the shots even as NATO is carrying out targeted air strikes within Libyan territory. The Yemeni President, after firing his entire Cabinet, has offered to step down but the protestors are intent on regime change. The situation in Bahrain has turned serious following the entry of Saudi troops to quell the uprising in Bahrain. The Saudi King has taken pre-emptive measures by announcing economic benefits worth $ 36 bn for the “betterment” of his people.

We remain positive on upstream companies like ONGC and OIL India as they have a neutral-positive correlation with crude prices. Moreover, both the stocks look undervalued at current levels. The state owned OMCs (IOCL, BPCL, HPCL) would continue to bear the brunt of uncertainty on subsidy sharing which would keep their shares depressed. Pending resolution of its acquisition by Vedanta, Cairn India should benefit from the huge rally in crude prices. Latest indications from the Govt. of India point towards letting the deal go through and leaving the contentious issues to be settled through arbitration.

The huge calamity in Japan has resulted in closure of ~1.5 mmbbld of refining capacity and has led to rise in diesel and fuel oil spreads. It is expected that Japan would use diesel, fuel oil and LNG for fulfilling its energy needs to replace the nuclear plants that have been shut down. Indian refiners, being diesel centric, should benefit from the surge in diesel spreads. Reports of a fall in gas production from KG-D6 are acting as a dampener on RIL; however, its refining & petrochemical divisions are performing well.

We however believe that the global economy is not strong enough to withstand elevated crude prices for a considerable length of time.

From the desk of : Deepak Darisi

Written by Fundamental Side

March 28, 2011 at 2:55 pm

“Crude” Shock

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Since my previous post about a month ago, petroleum and petroleum product prices have spiked, with Brent crude touching $ 110/bbl. WTI crude is set to go past the psychological $ 100/bbl mark, on the back of political unrest in Libya and Algeria, which are oil producing countries, unlike Egypt.

The political unrest in Libya has taken a definite turn for the worse with reports of upto 1,000 protestors being killed by the Libyan Government. Muammar Gaddafi, the despotic ruler of Libya, has threatened to sabotage the country’s oil facilities. This move is aimed at sending a message to protestors that the country would be plunged into chaos if he is forced to cede power. Already, Libyan oil production is down to 75% of its normal production levels. This “sabotaging of oil wells” has a historical parallel in the 1991 Gulf war when the retreating army of Saddam Hussein was ordered to set fire to 700 oil wells in Kuwait. It took the US forces 9 whole months to extinguish the fires!

Hence, India will continue to bear the brunt of high crude prices, with increasing under recoveries for the state owned OMCs (IOCL, BPCL, HPCL). Per unit under recovery for the previous fortnight stood at ` 10.74/lit for diesel, ` 20.56/lit for kerosene and ` 356/cylinder for LPG. These figures can be revised upwards when the OMCs re-calculate their under recoveries for the current fortnight. The higher total subsidy burden will burn a deeper hole into the government’s finances, making fiscal consolidation harder.

Historically, Cairn India was the one stock which moved in tandem with crude prices. However, the uncertainty over its pending acquisition by Vedanta Plc has resulted in the stock barely budging despite crude’s surge. Government owned ONGC and OIL India have to provide higher subsidies at higher crude prices, which results in lesser sensitivity of their shares to rising prices. OMCs will be negatively affected as their raw material prices go up, whereas the product prices (diesel, kerosene, LPG) are fixed. The Government is unwilling to deregulate diesel as inflation continues to be in double digits.

With ONGC’s FPO about to hit the markets, there are expectations that the Govt. will announce some positive measures in the Budget, for example, reducing customs duty on crude to 0% and that on petrol & diesel to 2.5% which will reduce the level of under-recoveries in the system. Let’s hope that the Govt. smoothens this “crude” shock to the Indian economy.

From the desk of Deepak Darisi

Written by Fundamental Side

February 24, 2011 at 1:22 pm

Why has the oil & gas sector underperformed?

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Crude oil prices, refining margins and petrochemical spreads have been rising throughout CY2010-11. In spite of this, the oil & gas sector has underperformed the broader index with the BSE Oil Index dropping by 2.7% as against a gain of 11.3% in the BSE 100 Index year-to-date.

The reasons for the above are not hard to find. Lack of clarity regarding the subsidy sharing mechanism hangs like an albatross around the necks of the upstream companies (ONGC, OIL India) as well as the refining & marketing companies (IOCL, BPCL, HPCL). The positive effect of petrol deregulation has been nullified by the relentless rise in crude prices (Brent crude touched $ 99/bbl couple of weeks ago). This has increased the projected under recovery for FY11 to Rs 73,000 cr, compared to the projection of Rs 53,000 cr made post petrol deregulation in Jun 2010. Hopes of diesel deregulation in FY11 have been nipped in the bud by the Government in the face of 8% plus inflation levels. The Government, which is expected to provide for half of the total under recoveries, will find it tough to rein in fiscal deficit as it has abolished the practice of issuing oil bonds.

Cairn India, whose stock price has a correlation of 95% with crude price, has not performed in line with crude prices, as it awaits Government approval of its take-over by Vedanta Plc. RIL has turned in a stellar Q3 performance on the refining & petrochemicals front, however, ramp up of gas output from the prolific KG D6 basin remains uncertain. This delay is also raising questions on optimum capacity utilization of the pipeline network that is being set up by GAIL (India) and GSPL in the near term. Petronet LNG will be the beneficiary of the developing gas shortage scenario in the country.

As a response to India’s over dependence on crude imports, the Government is considering a system of OALP (Open Acreage Licensing Policy) where oil firms can choose the blocks they want to explore without waiting for the Government to put them on offer. This will minimize the lead time between bidding & commencement of exploratory activities, which can be as long as 3 yrs. The Government also needs to apply its mind towards simplifying the maze of price controls, duties and taxes being charged on the regulated petroleum products so that investors gain clarity on the working of the oil & gas sector.

Written by Fundamental Side

January 24, 2011 at 3:02 pm