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Subsidy conundrum. Media articles suggest that the MoPNG is working on a subsidysharing formula, which will allow reasonable net crude realizations for OIL and ONGC, assuming a gradual recovery in global oil prices. We await the final announcement in this regard, as it will require the consent of the finance ministry, which will have to manage subsidies from the fiscal budget. We will get more comfort if the government implements measures to curtail LPG subsidies after Delhi elections.
�� India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details ��
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Media articles suggest that the MoPNG is considering a new subsidy-sharing formula As per unauthenticated media articles, the MoPNG is considering a subsidy-sharing formula, which will allow upstream companies to realize full crude price up to US$60/bbl and provide a subsidy discount of 85% of incremental crude price up to US$100/bbl and 90% above US$100/bbl. We highlight that the subsidy-sharing formula is presumably a proposal from the MoPNG and has to be approved by the finance ministry before it gets implemented. The government will be required to manage ~`350 bn of fuel subsidies at US$70/bbl of crude price in FY2016, if it implements this formula. We will get more comfort if the government initiates measures to curtail LPG subsidies after Delhi elections. Exhibit 1 shows net crude realizations on nominated fields at various levels of global crude prices under the proposed subsidy-sharing formula. Exhibit 2 shows EPS of OIL and ONGC at various levels of crude oil prices. Prefer OIL over ONGC, assuming modest recovery in crude prices ONGC is a better play on recovery in global crude prices given its positive impact on profitability of JV fields, value-added petroleum products and OVL; however, we would prefer OIL at current levels as the stock is trading at 8X FY2016E EPS as compared to ONGC at 10X, assuming (1) implementation of the proposed subsidy-sharing mechanism and (2) modest recovery in crude price to an average of US$70/bbl. We expect narrowing of the valuation gap between OIL and ONGC, as the former will benefit from commissioning of Brahmaputra Cracker and Polymer in the near term, which will off-take 1.35 mcm/d of additional gas volumes (over two years) over and above OIL’s current sales volumes of about 6 mcm/d—this should help in allaying concerns on production growth.
LINK
http://www.kotaksecurities.com/pdf/indiadaily/indiadaily05022015pu.pdf
Subsidy conundrum. Media articles suggest that the MoPNG is working on a subsidysharing formula, which will allow reasonable net crude realizations for OIL and ONGC, assuming a gradual recovery in global oil prices. We await the final announcement in this regard, as it will require the consent of the finance ministry, which will have to manage subsidies from the fiscal budget. We will get more comfort if the government implements measures to curtail LPG subsidies after Delhi elections.
�� India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details ��
��
Media articles suggest that the MoPNG is considering a new subsidy-sharing formula As per unauthenticated media articles, the MoPNG is considering a subsidy-sharing formula, which will allow upstream companies to realize full crude price up to US$60/bbl and provide a subsidy discount of 85% of incremental crude price up to US$100/bbl and 90% above US$100/bbl. We highlight that the subsidy-sharing formula is presumably a proposal from the MoPNG and has to be approved by the finance ministry before it gets implemented. The government will be required to manage ~`350 bn of fuel subsidies at US$70/bbl of crude price in FY2016, if it implements this formula. We will get more comfort if the government initiates measures to curtail LPG subsidies after Delhi elections. Exhibit 1 shows net crude realizations on nominated fields at various levels of global crude prices under the proposed subsidy-sharing formula. Exhibit 2 shows EPS of OIL and ONGC at various levels of crude oil prices. Prefer OIL over ONGC, assuming modest recovery in crude prices ONGC is a better play on recovery in global crude prices given its positive impact on profitability of JV fields, value-added petroleum products and OVL; however, we would prefer OIL at current levels as the stock is trading at 8X FY2016E EPS as compared to ONGC at 10X, assuming (1) implementation of the proposed subsidy-sharing mechanism and (2) modest recovery in crude price to an average of US$70/bbl. We expect narrowing of the valuation gap between OIL and ONGC, as the former will benefit from commissioning of Brahmaputra Cracker and Polymer in the near term, which will off-take 1.35 mcm/d of additional gas volumes (over two years) over and above OIL’s current sales volumes of about 6 mcm/d—this should help in allaying concerns on production growth.
LINK
http://www.kotaksecurities.com/pdf/indiadaily/indiadaily05022015pu.pdf
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