Public sector oil companies are poised to see structural improvements in their profitability as under-recoveries are expected to halve with ongoing price revisions and softer crude prices, pointed out a report of rating agency Crisil.
A Crisil Research indicated that over the next two years there will be an 8-10 per cent y-o-y decline in international petroleum product prices as supply will outpace demand, as a consequence of weak demand in North America and Europe and higher output in Iran, Iraq and North America. Also, with the ongoing price revisions, there will be gradual alignment of domestic diesel prices with international prices. Both factors will have a significant positive impact on both upstream and downstream PSU oil companies, it said stating that PAT (profit after tax) of downstream companies will increase by Rs.33-36 billion y-o-y in 2014-15 and by another Rs.7-10 billion in 2015-16. Also, profitability of these companies will get a boost with decline in interest burden.
On the other hand, upstream companies, which typically share 40-50 per cent of the total under-recovery burden on petroleum products, will see a sharper improvement of Rs.105-120 billion y-o-y in profit after tax (PAT) in 2014-15 and a further improvement of Rs.70-75 billion in 2015-16.
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The impact of reduced burden of under-recoveries will more than offset the impact of decline in realisations due to lower crude prices. If we include the benefit from the potential hike in gas price to US$8.4 per mmbtu, PAT of upstream companies will further increase by Rs 70-75 billion in 2014-15, resulting in an overall increase of Rs 215-230 billion, it added.
In 2013-14, with an increase of 50 paise every month, retail diesel prices have risen by Rs.6.90 per litre. Around 10-12 million duplicate LPG connections, which account for 7-8 per cent of overall connections in the country, have been cancelled over the last 18 months. Due to these measures, in spite of high crude oil prices (about $108 per barrel) and a sharp 11 per cent depreciation of the rupee against the dollar, under-recoveries in 2013-14 have declined by 13 per cent y-o-y. The new government has also continued with diesel price hike of 50 paise and market alignment of diesel prices are expected to continue as a result of which diesel (like petrol) will also be eventually de-regulated.