Oil Stocks
Outlook for the week – 22 to 26.12.2014
( www.rupeedesk.in )
Stocks of state-owned oil
marketing as well as upstream companies are seen range bound next
week as crude prices continue to
slide while rupee remains on a weak footing. While the
continuing slide in crude prices
is otherwise good for Indian Oil Corp Ltd, Bharat Petroleum
Corp Ltd and Hindustan Petroleum
Corp Ltd, the sharp decline has piled up inventory losses for
the three as the time lag between
the companies buying crude and selling products out of it is
around 45 days.
The recent depreciation in the
rupee has provided some cushion on that front. In the near-term,
the Indian currency is seen range
bound as the overseas markets enter Christmas holiday phase
next week, which will reduce
foreign investor activity. Also, December futures and options
contracts will expire on Wednesday,
leading to some volatility in the market.
The oil-marketing companies now
seem overvalued. If the broad market remains muted and
crude prices fall sharply, the
stocks of the three oil retailers may come under pressure. At current
levels of crude prices, the
outlook seems better for the oil producing companies Oil and Natural
Gas Corp Ltd and Oil India Ltd.
With diesel and petrol prices deregulated and cooking gas
subsidies being streamlined,
these companies' profitability will improve as subsidy shrinks.
However, fear of further decline
in oil prices may cap gains. "We continue to believe that OMC's
(oil marketing companies')
valuations are not expensive, and there will likely be further reratings...
However, given the sharp recent under-performance
of upstream companies (in last 3
months ONGC down 19% vs. Sensex
up 5%) driven mainly by the sharp correction in oil prices, we think risk-reward is now more
favorable for upstream PSUs.
