“I think LPG prices on a sequential basis have either gone up or firmed up and to that extent the LPG losses still continue to incur in the hands of oil marketing companies,” says Harshvardhan Dole, Vice-President, IIFL Securities.
Given the fact that crude prices have come down drastically and OMCs are earning a significantly higher marketing margins now, do you think that they might have recovered or recouped all the losses that they had incurred earlier and they are currently even recouping the losses that they are incurring in the LPG segment currently?
Harshvardhan Dole: While the oil prices are down and there is a general impression that oil marketing companies are making unreasonable amount of money in terms of selling petrol and diesel; however, people are forgetting the fact that the gross refinery margins or the product cracks have also collapsed.Surat Wealth Management
So, while people are focusing on the marketing side of the business, the refining side of the business is not making great amount of moneyMumbai Stock Exchange. For example, the Singapore refinery margin last I checked had crashed down to just about two or a dollar per barrel.
If you net out the expenditure, they are not even breaking even basis the benchmark margin. So, people need to take a holistic view rather than just looking at focusing on the marketing side of the business.
If you evaluate the integrated margins, they should be making reasonable money if not abnormally high amount of money after the oil prices which have corrected.
I think LPG prices on a sequential basis have either gone up or firmed up and to that extent the LPG losses still continue to incur in the hands of oil marketing companies.
And the way we see things by selling per kg of domestic cylinder or LPG, these companies are losing nearly about Rs 12 to Rs 13 in terms of per kg, on per cylinder basis one would have to multiply that number by 14.5 to arrive at aggregate number. So, just do not focus on one side of the business, which is rosy. There is challenge on the other side as well.
As you were mentioning that there are challenges on the other side, but the picture that is at least looking rosy on that side what could be the integrated margins that the oil marketing companies would now be getting by selling the retail fuels as per your estimate?
Harshvardhan Dole: So, if I were to look at petrol, the margins are in double digits. Diesel, on the spot basis margin are in double digit basis. However, these are spot margins and for drawing the quarterly P&L one would have to look at the YTD as well as QTD margins which for diesel are just about a rupee, rupee-and-a-half and for petrol these are like Rs 3 to 4 per litre on a quarterly basis. So, if you want to look at quarter, things will be reasonably okay, if not abnormally high for these companies.
Now if we consider the entire business, that is refining and the marketing segment combined, then do you think that oil marketing companies would have some margin to reduce the fuel prices?
Harshvardhan Dole: So, in my opinion, one should not look at these numbers. One would have to look at how the volatility in the oil prices is likely to emerge.
If one believes that for a reasonable period in time oil will remain below 60, then basis that call there is a room to cut the petrol and diesel prices. However, I prefer to be conservative. I am still working with an oil price for the year which will be in northwards of $70 and therefore scope to cut product prices remains reasonably low if not very high.
And when it comes to now oil explorers like ONGC, like within a matter of like 15-20 days things have changed and narrative have completely changed for them, from being one of the top preferred pick in the oil and gas space given the fact that crude prices were stable, they were also earning when it comes to gas prices also in the domestic market, but now given the sharp fall in crude prices, how are you looking at ONGC as an investment pick right now, would you suggest investors to still hold on to ONGC given the fact that we have seen a sharp drop in crude prices?
Harshvardhan Dole: So, our published numbers assumed Brent at 75 and that is how we have arrived at a consol EPS of around Rs 41. With every $5 change in oil prices, consol EPS will drop by about 7% to 8%. And to that extent if Brent were to average at say $70, then on a consol basis ONGC will report an EPS which is anywhere between Rs 35 and Rs 38.
So, at the current price, the valuations are very attractive as compared to other integrated regional players in the region and to that extent ONGC offers us a very good trade-off in terms of higher upside versus lower downside and we continue to like in general the PSUs in the sector including ONGC.
Surat Investment
