Skip to main content

Why OMC stocks aren't reacting to crude prices

Why OMC stocks aren't reacting to crude prices
Brent crude oil price has corrected sharply during the December 15 quarter, but its immediate beneficiaries -- the oil-marketing companies (OMCs) -- are not reflecting the favourable market conditions in their share prices.
Brent crude, which reached $52.71/barrel on October 9, is now trading $36 with expectations of a further decline. However, despite a 46% correction in oil prices, the shares of Bharat Petroleum (BPCL), Hindustan Petroleum (HPCL) and Indian Oil (IOC) jumped only 6-8%. Analysts believe it is partly because the stocks of OMCs have already factored in the positives and are trading at rich valuations.
The decline in crude prices, oil and gas reforms as diesel price deregulation and direct subsidy transfer for LPG, demand revival, improvement in refining and marketing margins and declining working capital requirements all have led the OMC stocks rising 2 to 4 times in past two years.
It is only IOC that has lagged its peers -- BPCL and HPCL -- because it recently commissioned its new refinery at Paradip. Since a newly commissioned refinery takes about a year to stabilise and also during this period the costs remain high, IOC earnings still have some headroom to grow and analysts see some more upside for the stock.
Analysts at Barclays say, "We stay underweight on BPCL and HPCL, but find valuations less stretched and expectations more modest for the larger IOC, rating it overweight."
For BPCL, which comparatively also has a play in exploration and production (E&P) segment, a low crude price scenario has led to relatively lower valuations for this business. However, success in E&P activities can act as a trigger or if oil prices rebound.
Another factor limiting upsides in the stock prices of OMC is their ambitious investment plans, which they announced recently. These plans will partly negate the benefits arising out of lower working capital requirements.
Nitin Tiwari at Antique Stock Broking says OMCs are getting into expansion phase, leading to significant capital expenditure over the next three-to-four years. While BPCL plans to spend Rs 100,000 crore over the next five years, HPCL has planned a capex of Rs 45,000 crore. The increased expenditure will mean increased borrowing and hence higher interest outgo.
Tiwari estimates total borrowing for BPCL and HPCL to increase to Rs 24,000 crore and Rs 30,000 crore by FY18 from Rs 11,700 crore and Rs 17,100 crore in FY15, respectively, largely on account of capex-related long-term debt.

Comments

  1. Pooja Pariya23 December 2015 at 01:50

    It is a great sharing me...I am very much pleased with the contents you have mentioned. I wanted to thank you for this great article.
    Stock Market Trading Tips

    ReplyDelete

Post a Comment

Popular posts from this blog

Wizard of Dalal Street: Govind Parikh's investment mantra

Wizard of Dalal Street: Govind Parikh's investment mantra Govind Parikh of Govind Parikh Securities says selling right is more important than correct buying. He says it is necessary to keep a lot of cash. "We keep an average 10 percent cash in our portfolio," he says I like to buy things in a bad market. Additionally, don't look current cash flow, concentrate on future cash flows — that is what  I look at," says Govind Parikh of Govind Parikh Securities. He advises investors to buy good quality stocks when the market crashes. While sharing his investment philosophy with ace investor Ramesh Damani, on the Wizards of Dalal Street, Parikh says management integrity is very important when deciding which stock to bet on. He tells investors not to buy stocks impulsively. According to him, selling right is more important than correct buying. He says it is necessary to keep a lot of cash. "We keep an average 10 percent cash in our portfolio," he says. He al...
2 comments
Read more

Bank Nifty

Bank Nifty Bank Nifty is a Sell at Current Levels with a Stop Loss of 12,750 Once Below 12,400 the next major Support shall be only 12,000 Levels so a person can go short is bearish or buy putt if moderately bearish . 
7 comments
Read more

Budget 2018: Mega health plan to cost Rs 1 lakh crore

The mega healthcare plan for the poor, as announced in the Budget, will cost about Rs 1,00,000 crore annually and curtail states' autonomy to design their own policies in the sector, says a research paper, authored by a professor at economic think tank NIPFP. The paper's estimate is 10 times higher than the one made last week by Niti Aayog adviser Alok Kumar, who had said that the National Health Protection Scheme (NHPS) will cost around Rs 10,000-12,000 crore annually. National Institute of Public Finance and Policy (NIPFP) Assistant Professor Mita Choudhury said in the paper -- 'The National Health Protection Scheme in the Union  Budget 2018 : Is it in the Right Direction?' -- that resource requirements for implementing NHPS are likely to be very high. Not only would such a scheme impose a heavy burden on both the Union and the states' exchequers, it will also curtail states' autonomy to design their own policies in a sector that is constitutionally ma...
Post a Comment
Read more