How the oil and gas sector fared in the year gone by

Crude oil price rise upsetting many an applecart, consummation of big-ticket deals, follow-on public offers deferred at the last minute...

These were some of the events that made 2011 an action-packed year for India's hydrocarbon players.

But the market took a dim view of the sector. Except for a couple of stocks, the rest fell during the calendar.

Downstream takes a crude hit

The price of crude oil (Brent) shot above the $100 a barrel level early in February and stayed there for the rest of the calendar. Much to the grief of the downstream oil marketing companies (OMCs) — Indian Oil, BPCL and HPCL. With diesel, LPG and kerosene sold below cost, the financials of the OMCs were thrown into disarray by escalating under-recoveries.

The government finally raised prices of the controlled products to some extent and cut import duties. While this moderated under-recoveries, the respite was short-lived. The rupee's steep depreciation after July added to crude oil import cost.

Meanwhile, OMCs continued to increase the price of petroleum (deregulated in June 2010) at regular intervals and, in one rare instance, even reduced it. At present, total under-recoveries for FY-12 are estimated to be in excess of Rs 120,000 crore.

With uncertainty about the quantum and timing of the government's share of the burden, OMCs were on tenterhooks and were forced to borrow heavily. Not surprisingly, the market has not been kind to these stocks, which have lost between 25 per cent asnd 35 per cent in 2011.

Standalone refiners such as CPCL, MRPL and Essar Oil were impacted by heavy forex losses caused by the rupee's weakness in the September quarter. The Essar Oil stock was further impacted by the alleged involvement of a group company in the 2G scam, and was the worst performer (down 65 per cent) in the energy pack.

Upstream also reels

Ideally, buoyant crude oil price should translate into the market being upbeat about upstream oil companies. No such luck for ONGC and Oil India, which lost around 18-19 per cent.

These companies along with gas transmission major, GAIL, usually bear around a third of the under-recoveries. This nullifies, to a good extent, the gains upstream companies stand to make from rising crude oil price.

But more than this known risk factor, what seems to have dented the market's confidence was the unexpected move in the March quarter to raise the FY-11 burden on upstream companies from the usual one-third to 38.7 per cent.

This negative surprise by the government saw upstream stocks being punished and the markets turning twice shy. Continued uncertainty about the subsidy sharing has contributed to their poor show on the bourses.

This, despite good results posted by ONGC and Oil India in the recent quarters, thanks to better realisations and capped subsidy burden.

It also did not help the government to bridge the fiscal deficit, projected ONGC, more than once, as a candidate for a follow-on public offer (FPO).

Like most public sector stocks, ONGC's stock price was beaten down in the run-up to the proposed offer.

While the government anti-climactically withdrew the offers at the eleventh hour, the stock seems to continue to be under an FPO overhang.

Reliance falters

Sector behemoth Reliance Industries (RIL) was in the news mostly for the wrong reasons, but it did have some good things going for it. Gas output at its flagship KG-D6 fields continued to decline, with the present production being only around 40 mmscmd.

This was a major drag on the stock, and overshadowed the robust showing by the company's refining and petrochemicals segments.

On the positive side, the 30 per cent stake picked by the global exploration giant BP in RIL's faltering hydrocarbon fields for $7.2 billion was seen as a vote of confidence in the company.

The company also had a series of run-ins with the government auditor, regarding alleged over-spending by the company in the KG-D6 block. Also, RIL was at loggerheads with the government on the matter of cost-recovery. Net-net, the stock was an underperformer and lost around 30 per cent.

Vedanta gets Cairn, finally

After long delays and a good deal of arm-twisting, Vedanta's takeover of Cairn India finally saw the light of the day. ONGC extracted its pound of flesh with not-so-little-help from the government. Cairn India, after initially refusing to do so, agreed to share the royalty cost on output from the prized Rajasthan fields. The deal's done but the country's image as an investment destination may have been bruised.

The stock's fortunes during the year yo-yoed with the twists and turns of the case and it fell sharply at the height of the dispute when litigation seemed inevitable. The dispute resolution has seen the Cairn stock gain strength recently, though it still trades lower than at the beginning of 2011.

Gas was good for you

Petronet LNG, India's dominant gas importer, was the main beneficiary of the dip in domestic gas output. The company registered a sharp increase in volumes and more than doubled its profits. The stock has been an outperformer, gaining 28 per cent, compared with the 23 per cent dip in the Sensex.

City gas distributors such as Indraprastha Gas and Gujarat Gas also saw healthy growth in volumes and profits with the cost advantage of natural gas over other fuels working in their favour. But increased dependence on costlier spot LNG has resulted in moderation in margins and stock prices. Gujarat Gas has also lost quite a bit on the bourses in recent months on news of the promoter seeking an exit from the company.

Gas transmitters GAIL and GSPL pressed ahead with their network expansion plans, and managed good growth in profits. But concerns about underutilisation of the expanded network due to low domestic gas supplies took a toll on the stocks. While the GAIL stock is down around 23 per cent, GSPL trades around 30 per cent lower.

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