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Rising oil prices should logically translate into healthy profit growth for both upstream oil companies (thanks to increased realisations) and downstream players (by improving refining margins).
However, no such luck for oil PSUs in India, which continue to be bogged down by under-recoveries arising from selling petrol, diesel, kerosene and domestic LPG below cost.
While downstream refiners-cum-oil marketing companies (IOC, BPCL and HPCL) bear the first-line impact of the under-recoveries with uncertainty in the timing and quantum of compensation, the net realisations of upstream oil majors (ONGC and Oil India) have in recent years been capped because of discounts on crude supplied to the downstream companies. An increasing crude oil price may translate into higher under-recoveries and subsidy burden for the above companies, unless selling prices for products are hiked or the government bears more of the burden. At current rates, total under-recoveries for the next fiscal are expected to be in excess of Rs 100,000 crore. Not the best of situations to be in.
However, amidst the uncertainty and the gloom in the public sector oil segment, pure-play refiners such as Chennai Petroleum and MRPL stand to benefit from the expected improvement in refining margins, due to ascendant crude oil prices.
Product cracks (difference between the price of refined products such as petrol and diesel vis-à-vis crude oil) tend to increase more than crude oil prices. This is seen in the recent improvement in gross refining margin (GRM) for most refiners. The increasing refinery complexity should also help the above pure-play refiners process cheaper, heavier crude and improve GRMs.
Among private sector players, oil explorer Cairn India should benefit from increasing realisations on crude oil output. Behemoth Reliance Industries should also gain from an improvement in GRMs, aided by its high complexity refineries. Essar Oil should also benefit.
High crude prices incentivise exploration activity, which should bode well for the prospects of rig and service providers such as Aban Offshore and Shiv-Vani Oil and Gas.
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