New Delhi: Fitch Ratings today said low oil rates and price deregulation in the country’s oil and gas sector will have a positive impact on the rated companies in the sector, especially the oil refining and marketing firms. Upstream companies like ONGC will benefit from having to offer lower discount on crude oil they sell to refiners following greater clarity on the fuel subsidy-sharing formula.
“These changes will also minimise the negative impact on their cash generation from lower oil and gas prices”, Fitch said in a report. Fitch expects refining margins to narrow from January-June levels this year, although margins will remain “relatively robust in 2016.”
“We also expect a high level of volatility in crude-oil prices, exposing refiners to inventory gains and losses during 2016”, it said. The sector outlook for Indian oil and gas entities is negative in 2016.
“The benefits from the price reforms and lower global oil prices for refining and marketing companies will be offset by their large capex needs in the medium term, which will lead to negative free cash flows. However, the rating outlooks for 2016 are stable”, it added.
Fitch said low crude-oil prices and diesel price deregulation would be positive for marketing firms Indian Oil Corp (IOC), Bharat Petroleum Corp Ltd (BPCL) and Hindustan Petroleum Corp Ltd (HPCL) as that would trim their under-recoveries on subsidised fuels, working capital and related debt requirements.
“Lower discount requirements on the two state-owned exploration and production firms Oil India Ltd and Oil and Natural Gas Corp (ONGC) would benefit their financial profiles.
“There is also greater clarity on the subsidy-sharing arrangement between the state and the two upstream producers concerning kerosene and liquefied petroleum gas (LPG). These changes have minimised the impact on the upstream producers’ cash generation from lower oil and gas prices”, Fitch said. It said benchmark Brent oil price may stay at USD 55 per barrel for one more year.
“Domestic natural gas prices will be lower in 2016 based on the government’s pricing formula, which links domestic gas prices to several international gas reference prices,” it said. India has however proposed in October 2015 to relax natural gas price controls for new fields to incentivise exploration and production activities.
