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Oil stocks on fire, pull Sensex to a new high

Saturday, 7 June 2014 - 7:35am IST | Place: Mumbai | Agency: dna

Oil index surges 4.5%; rally may continue in near term

Oil & gas stocks were on a roll on Friday, lifting Sensex to a new high of 25396.46 following reports that Narendra Modi-led government will most likely announce the long-pending gas price hike decision in two weeks.

ONGC was top gainer followed by GAIL India and Oil India. ONGC shares rallied 10.6% to Rs 464, lifting its market cap by Rs 37,944 crore in a single day. Shares of Mukesh Ambani-owned Reliance Industries too surged nearly 3%, highest in past two weeks, and GAIL India jumped 7.5%. The S&P BSE Oil & Gas index, which had remained almost flat during past fiscal surged 4.8%, the highest in six years.

The petroleum ministry is expected to make a presentation on the issues pertaining to the oil & gas sector to Prime Minister Narendra Modi in the next few days, and a clear direction on gas pricing will emerge after that. The earlier government had notified the gas price hike based on the formula suggested by C Rangarajan panel in January to be effective April 1, 2014. However the price hike was postponed following general elections. Gas prices are likely to double from current $4.2/mmBtu if implemented as per Rangarajan formula.

Most analysts said while gas price hike was one reason for such a huge rally in oil stocks, reports of possible one-time hike in liquid petroleum gas (LPG) price also fuelled buying in these counters.

"Government is seen bringing reforms in subsidy mechanism. Diesel losses could become nil after four months, and LPG cap could also be reduced from current 12 to 9. All these measures could bring down subsidy burden by Rs 10,000 crore," Gagan Dixit, a senior analyst with Quantam Capital, said.

Under-recovery in current fiscal is not likely to cross Rs 70,000 crore, and if the government continues to share 50% subsidy burden then it could significantly improve ONGC's crude realisations and its profitability, Dixit said. The Maharatna company's net crude price realisation could improve $70 per barrel and current fiscal as against $40 on an average in last fiscal. The stock may test Rs 700-Rs 800 in near future, he said.

Oil marketing companies – BPCL, HPCL and IOC-- also gained around 2% on bourses as under-recoveries on diesel, LPG and kerosene are seen declining. Currently, the under-recovery of PSU oil companies on kerosene stands at Rs 32.87 per litre and LPG at Rs 432.71 per cylinder.

OMCs would now be less dependent on the government for subsidy payment, which would bring down their needs for short-terms fund and interest costs.

"While interest cost of OMCs are likely to decline sharply, they will go for capacity expansion over next 2-3 years because of which reduction interest cost may not reflect on return ratios," Dhaval Joshi, a research analyst with Emkay Global Financial, said. He, however, stressed that lower under-recoveries will surely lead to re-rating of oil retailing companies.

Most analysts expect rally in oil & gas stocks to continue in near future. Around 10% upside cannot be ruled out in OMC stocks. Dixit feels near-term upside in case of ONGC has been captured. He is bullish on RIL and GAIL India, purely due to attractive valuations.

"GAIL represents very strong story as it is in post capex mode, most of its pipeline infrastructure is ready and utilisation of its pipeline is likely to improve from current 10%," he said.

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