We saw the Crude Oil Price collapse from $100+ per barrel levels by about 50% during the last few months of 2014. Then the prices stabilized and spend most of the period between Jan to March of 2015 in the range of $50 to $60 range. This Crude price collapse helped the Indian Govt to get rid of the Subsidy being given to Diesel and now both Petrol & Diesel prices are market driven. Even the LPG prices have come down to some extent which has further reduced the overall fuel-related subsidy burden. This coupled with the implementation of the Direct Benefit Transfer scheme, which has helped plug subsidy leakages to the extent of nearly 20%. All this has led to the Govt going ahead and bravely announcing that henceforth the Govt will be footing the entire fuel-subsidy and the Oil Marketing companies as well as the Oil & Gas producers will not have to shell out anything towards the subsidy.
No More Subsidy sharing means that the Public Sector OMCs like Indian Oil Corporation, BPCL & HPCL as well as Oil & Gas Producers like ONGC and Oil India will get full price of the products they sell and hence will be able to report true Profit & Loss Accounts after many many years. It goes without saying that it is Huge Huge Positive development for all these companies. Consider the business models of IOC, HPCL & BPCL. Majority of their revenues comes from retailing of Petrol & Diesel and bulk supplies. Since these fuels are now completely deregulated, it is assumed that these companies are now earning profit on these revenues. The Profits though will depend on their refining margins, which are not so great for either of the PSU Refiners. Still the volumes are large and hence any margin earned will be good. These companies are into distribution of LPG cylinders to homes as well as commercial users and supply of Kerosene to PDS outlets. Until the DBTL was implemented, these companies used to procure LPG at market rates, sell them at regulated rates and then claim the difference from the Govt. as subsidy. Similar was the case with Kerosene supplies. This used to put pressure on the Cash Flows of the PSU OMCs. With the introduction of DBTL, these OMCs are charging market rates on every LPG cylinder they supply and the customer is paid the subsidy amount directly in their Bank account by the Govt. So here too the OMCs are now earning profits. Hopefully DBTL will be introduced for Kerosene supplies as well very soon and once that happens, these PSU OMCs will be completely responsible for improving or destroying their profitability.
Coming to Crude Price movements, have a look at the chart alongside. After rapidly falling & dipping below the $50 per barrel mark, the crude price have been showing signs of gradual upmove. In the recent days we have seen the Brent Crude prices moving above the $65 level and getting closer to the $70 level now. For every dollar that the Crude price moves up, it is slight bit of negative for the Indian Economy in general, but it is substantially positive for all the companies that produce Oil. I am talking about ONGC and Oil India from the PSU basket. When ONGC was sharing subsidy, the company claimed that it was effectively getting only about $60-65 per barrel for it's Oil even when the market price ruled in triple digits. Now that these companies have been spared by the NDA Govt from sharing of fuel subsidies, every extra dollar that they get for their Oil will go straight to profits. This is because the Cost of producing Oil remains more or less constant. So the changes in price realisation has a very big impact on the profitability of Oil producing companies. If ONGC manages to realise an average rate of $70 per barrel during the current fiscal, then it's profits should be certainly higher than previous years.
Probably the Biggest beneficiary of Crude Price rise in India will be Reliance Industries Ltd. When Crude was closer to $50 per barrel, RIL's Shale JVs were struggling to cover their costs. But with Crude now above $60 and closer to $70 per barrel, the JVs will be much more comfortable on the profitability front. This will definitely boost RIL's consolidated profits. There will be benefits for RIL even in it's core business of Refining & Petrochemicals. Firstly the Topline will improve in line with increase in Crude prices. And the Bottomline too could be moving higher as the company is currently enjoying the best margins in it's history. In Percentage terms, the margins will most probably drop, but in absolute per barrel terms it should not be much lower and coupled with higher turnover, it should add to the company's profits. Another factor benefiting the company is that with every passing month, the volumes it sells from it's Fuel Retail outlets is moving higher. As a strategy, RIL is pricing both Petrol & Diesel about 15 to 25 paise per litre lower than the prices at outlets of PSU OMCs in every region. This will help the company gradually increase it's volumes & market share which is probably less than 1% currently. Even though RIL is pricing the fuels slightly lower than that of PSU OMCs, the profits it earns per litre is expected to be much more because of it's way superior Refining Margins compared to that of the PSU OMCs. It will take some time for the Fuel Retailing business to start having any significant impact on RIL's numbers, but it's significance will keep increasing with every passing month.
No More Subsidy sharing means that the Public Sector OMCs like Indian Oil Corporation, BPCL & HPCL as well as Oil & Gas Producers like ONGC and Oil India will get full price of the products they sell and hence will be able to report true Profit & Loss Accounts after many many years. It goes without saying that it is Huge Huge Positive development for all these companies. Consider the business models of IOC, HPCL & BPCL. Majority of their revenues comes from retailing of Petrol & Diesel and bulk supplies. Since these fuels are now completely deregulated, it is assumed that these companies are now earning profit on these revenues. The Profits though will depend on their refining margins, which are not so great for either of the PSU Refiners. Still the volumes are large and hence any margin earned will be good. These companies are into distribution of LPG cylinders to homes as well as commercial users and supply of Kerosene to PDS outlets. Until the DBTL was implemented, these companies used to procure LPG at market rates, sell them at regulated rates and then claim the difference from the Govt. as subsidy. Similar was the case with Kerosene supplies. This used to put pressure on the Cash Flows of the PSU OMCs. With the introduction of DBTL, these OMCs are charging market rates on every LPG cylinder they supply and the customer is paid the subsidy amount directly in their Bank account by the Govt. So here too the OMCs are now earning profits. Hopefully DBTL will be introduced for Kerosene supplies as well very soon and once that happens, these PSU OMCs will be completely responsible for improving or destroying their profitability.
Probably the Biggest beneficiary of Crude Price rise in India will be Reliance Industries Ltd. When Crude was closer to $50 per barrel, RIL's Shale JVs were struggling to cover their costs. But with Crude now above $60 and closer to $70 per barrel, the JVs will be much more comfortable on the profitability front. This will definitely boost RIL's consolidated profits. There will be benefits for RIL even in it's core business of Refining & Petrochemicals. Firstly the Topline will improve in line with increase in Crude prices. And the Bottomline too could be moving higher as the company is currently enjoying the best margins in it's history. In Percentage terms, the margins will most probably drop, but in absolute per barrel terms it should not be much lower and coupled with higher turnover, it should add to the company's profits. Another factor benefiting the company is that with every passing month, the volumes it sells from it's Fuel Retail outlets is moving higher. As a strategy, RIL is pricing both Petrol & Diesel about 15 to 25 paise per litre lower than the prices at outlets of PSU OMCs in every region. This will help the company gradually increase it's volumes & market share which is probably less than 1% currently. Even though RIL is pricing the fuels slightly lower than that of PSU OMCs, the profits it earns per litre is expected to be much more because of it's way superior Refining Margins compared to that of the PSU OMCs. It will take some time for the Fuel Retailing business to start having any significant impact on RIL's numbers, but it's significance will keep increasing with every passing month.
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