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● With crude prices above US$90/bbl, estimates for FY11 total oil
retail losses are close to Rs700 bn, eliminating gains from the petrol
price deregulation and LPG/SKO price hikes earlier this year.
● The oil ministry states that ONGC, OINL and GAIL will not fund
more than a third of these losses. Given the government plans to
sell ONGC stocks, this constraint should hold. FY11E EPS for
BPCL, HPCL and IOCL (OMC) then depend on amounts the
government is willing to pay.
● The government has historically tried to keep oil marketing
companies (OMC) from reporting losses. At US$90/bbl oil, we
estimate the government will have to pay at least Rs310 bn (up
20% YoY) just to achieve this. Higher amounts will be needed to
leave OMC with material profits. Increasing retail prices now will
yield little relief. Rs2/litre diesel and Rs25/cylinder LPG price
increase would reduce losses by only Rs42 bn.
● So far, the government has struggled to pay, having missed the
50% funding target in 1H11. No payments have yet been
budgeted for FY11. Comments from the finance ministry indicate
a mood to bargain payments down. The probability that the
government pays more than the bare minimum seems low ñ FY11
earnings/RoE for all the OMC are likely to disappoint significantly.
We remain sellers.
Larger-than-expected FY11 losses
When the government deregulated petrol prices, increased LPG/SKO
prices in June, the total FY11 loss estimates fell from c.Rs700 bn to
Rs530 bn. The recent increase in crude price and the governmentís
reluctance to increase diesel prices mean that actual FY11 losses
would be much higher than expected. If oil stays at US$90/bbl through
4Q, all gains from the June measures will be lost. Total FY11 losses
will reach Rs700 bn.
Funding of these losses remains very uncertain
While the government had earlier stated that it would pay at least 50%
of the losses in cash, that plan seems to have been discarded.
Comments from the finance ministry suggest the target is lower; even
the oil ministry refrains from repeating the 50% promise now. With the
planned sale of ONGC stock, upstream share of subsidies should not
materially surprise the expected 1/3rd share, though.
The OMC can bear only so much
We estimate that the oil marketing companies (OMC) ñ BPCL, HPCL
and IOCL ñ can between them bear about Rs150 bn in net underrecoveries before they begin to report losses. Given each of these is a
ëNavratnaí public sector unit, the government tries to keep them
profitable on headline. Historically, the government seems to have
back-calculated the amount of payments it needs to make in order to
achieve this result.
Accounting entries such as inventory gains/losses, forex gains/losses,
taxation has helped/hurt the pro-forma P&L. If oil stays at US$90/bbl,
we do not expect the OMC to book material inventory gains
The government will have to pay a large amount, just to
keep heads above water
If oil remains close to US$90/bbl, we estimate the government will
have to pay at least Rs310 bn (up 20% YoY) just to keep the OMCs in
the black. If diesel prices are increased Rs2/litre and LPG
Rs25/cylinder now, savings would be of the order of Rs42 bn ñ still
leaving large funding needs.
So far, the government has struggled to pay ñ missing the promised
50% in 1H11. No payment has yet been budgeted for FY11. Budgeted
disinvestment revenues may not materialise. Media comments from
the finance ministry indicate a mood to bargain payments down. The
probability that the government pays more than the bare minimum
seems low. FY11 earnings/RoE for all the OMCs are likely to
disappoint significantly. We remain sellers.
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