January 14, 2012

Sector: Oil and Gas

Source: Financial Express

• Morgan Stanley has downgraded the country's major oil and gas companies and lowered the rating of Reliance Industries (RIL) to underweight.
• The brokerage has demoted the industry view to 'cautious' due to the negative outlook for refining and petrochemical margins, and a higher subsidy burden due to a weaker rupee.
• The BSE Oil & Gas Index, one of the worst performers in 2011, having lost 29% against a 25% decline in the Sensex.
• The BSE Oil & Gas Index shed 0.4% to end the session at 7,821.7. Reliance Industries, on the other hand, lost 0.7% to close at R731.8.
• The brokerage downgraded Reliance Industries in a counter-consensus call, as it cut the earnings forecast for 2012-14 by 9-19%, 11-20% below the street estimates.
• Despite a sound balance sheet, increasing contribution from non-core earnings and diversification in non-core businesses could lead to a stock de-rating/conglomerate discount, the report said.
• According to the note, the weak outlook for gross refining margins (GRM) and petrochemicals, to which RIL has a high sensitivity, sliding E&P (exploration and production) volumes and tapering earnings growth call for a downgrade of RIL.
• The stock has not only underperformed the market in 2011, with a 35% slide against a 25% drop in the Sensex, but also accounted for close to 16 % of the Sensex's 5054 point loss.
• Even Oil Marketing Companies (OMCs), namely, BPCL and HOCL have been downgraded to underweight owing to a subsidy burden estimate of $26 billion following a 16% depreciation in the rupee against the dollar in the last six months.
• The report estimates that for every R1 per dollar of depreciation, the subsidy bill goes up by $550 million.
• The foreign brokerage sees a modest price hike only in April. The path to petroleum decontrol, in our view, seems to be delayed due to upcoming elections, a high crude oil price environment, and a weaker rupee, it said in the note.
• On Thursday, Crisil noted that under-recoveries for OMCs on sale of regulated fuels could touch an all-time high of R1.4 trillion in 2011-12 due to high crude oil prices and a weak rupee.
• In line with the sharing pattern since 2006-07, Crisil Research expects the government to contribute at least 50% of the under-recoveries — about R70,000 crore - as compensation to the OMCs during the current fiscal year, it notes.
• Crisil expects upstream oil companies to share about 40 % of the underrecoveries - R56,000 crore - as upstream assistance to the OMCs, up from 33%in the past.
• The OMCs are likely to absorb the remainder — R14,000 crore - as marketing losses, twice their marketing losses of R70,00 crore in 2010-11, the note says.