This is positive for the sector, as it removes anomalies and will accrue benefits in exploration activities but in the long run.
In the near term, it will not have much impact on companies’ earnings, say analysts.
Thus, the scrip of government-owned upstream entities such as Oil and Natural Gas Corporation (ONGC) and Oil India did not react much, closing at Rs 205.70 (up 0.3 per cent) and Rs 309.55 (up 0.06 per cent), respectively, on Thursday.
The bigger news has been the sharp rise in oil prices, from $33 levels at end-February to $40 a barrel. The stocks have gained significantly, with ONGC up six per cent and Cairn India by 21 per cent from their lows on Budget Day. Oil India has not seen much rise, due to concerns on production from maturing fields. Nevertheless, higher crude oil prices are always beneficial for producers.
On the flip side, the Budget has proposed a cess of 20 per cent on oil produced locally, much higher than Street expectations of eight to 10 per cent. This will limit the gains of upstream companies when oil prices are above $45 a barrel. However, till this point, the new cess rate will be marginally positive. Consider that the government so far levied a fixed cess of Rs 4,500/tonne, translating to $9 a barrel. At 20 per cent and assuming a price below $45 a barrel, the companies will pay less cess. But, if prices rise to, say, $50, they'll have to pay $10 a barrel as cess, since this will be a percentage of the crude oil price.
Analysts do not see oil prices rising significantly in the near to medium term. They see it averaging $45-50 in FY17, similar to the levels in FY16. It is only from FY18 that analysts expect a recovery in crude oil prices. For instance, analysts at HSBC estimate $45/60/75 a barrel in FY17/18/19, respectively. With revised cess rates, they see a three per cent rise in FY17 earnings for Cairn India, a one per cent negative impact on earnings for ONGC and the earnings estimate remaining unchanged for Oil India.
But, even with higher crude prices during FY18, the research house has lowered its earnings per share estimate by nine per cent each for Cairn India, Oil India and ONGC. They arrive at a target price of Rs 134 for Cairn, Rs 446 for Oil India and Rs 233 for ONGC. The consensus target price as per analysts polled in March for ONGC, Oil India and Cairn stands at Rs 230, Rs 388 and Rs 153, respectively.
For Reliance Industries and ONGC, the pricing freedom for petroleum products from the hard-to-explore deep waters, as on market rates, is positive. The price of gas will come to $7 a million British thermal units (mBtu), compared to the current $3.82 a mBtu, to be revised to $3.15 a mBtu in April. However, deep water exploration costs are also much higher and analyst S P Tulsian says till oil prices remain below $50, exploration will not excite any player. Not surprisingly, Reliance Industries’ shares ended 2.9 per cent down at Rs 1,012 on Thursday.