ENAM - >> Dec 2011 | Oil & Gas

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Burgeoning under-recoveries coupled with government & OMCs’ inability to take significant hits would result in higher subsidy burden on upstream companies. We expect FY12 upstream subsidy burden at 54% versus historical and H1FY12 levels of 33%.

Upstream stocks under threat: We expect 17-44% YoY dip in FY12 EPS for ONGC & OIL due to higher subsidy burden. ONGC would receive partial reprieve due to higher profits from OVL and Rajasthan Block. Huge cash levels of ONGC & OIL would increase the risk of government pushing for cross-holding of PSU shares to adhere to its own divestment plans.

GAIL offers a good defensive bet as threat of higher subsidy burden on GAIL is negated by very low profitability of its LPG production business. Its recent stock price correction offers good entry opportunity for investors looking at safe havens.

OMCs’ valuations are attractive (especially BPCL) but fundamental concerns over cash crunch would remain in the interim. OMCs are trading near their lows of CY08.

Key Assumptions: Crude at USD 112/ bbl for FY12 & USD 105/ bbl FY13; USD/INR at 47.6 and 46.5 for FY12 & FY13.