UBS: India Oil and Gas Expect hike in diesel as oil hits 25-mth high

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UBS Investment Research
India Oil and Gas 
Expect hike in diesel as oil hits 25-mth high
 
„ Rising oil prices to put pressure on the government to hike prices
At this point, we expect a 4-5% hike in diesel prices (although a 10% is needed
with oil at US$90/bbl). The price hike will likely be positive for the oil marketing
companies, which have, on an average, fallen 16.3% 3MTD. However, until there
is greater clarity on pricing, we think the stocks will underperform in a rising oil
price scenario. Upstream companies i.e. we believe Cairn India and ONGC are
clear beneficiaries; GAIL also provides for some hedge, in our view.



„ Deficit to touch US$24bn with oil at US$100/bbl
Our sensitivity analysis suggests the deficit will reach US$24bn if oil were to reach
US$100/bbl. Assuming modest change to product prices, the losses for the industry
could rise from the US$10bn in FY10 to US$13bn in FY11 (average oil price at
US$85/bbl). We estimate it would more than double, to US$24bn, from FY10
levels if oil moves to US$100/bbl.

„ Increase in oil prices positive for upstream companies
On our estimates, upstream companies have 6-8% earnings upside for every
US$5/bbl increase in oil prices. Cairn India has the highest leverage but ONGC is
not too far behind. For ONGC, we assume that a third of the upside will be paid
out as subsidy to the oil marketing companies. Cairn India is best leveraged to
rising oil prices, in our view.

„ Top picks
Our preferred picks in India are Essar Oil and GAIL (India) Ltd.