Oil below $50/bbl: Companies at risks

There are many companies whose earnings are at risks with crude oil trading below $50/bbl (right now below $40/bbl). Indian upstream companies like ONGC, RIL, Cairn India and GAIL , Indian Capital Goods companies like L&T and Punj Llyod. Offshore companies like Aban Offshore. Refining companies like RPL.

Cairn India is highly leveraged to Oil price. Every $1/bbl decrease in WTI reduces Cairn’s EPS by 5.2% in FY09E, 2.3% in FY10E. ONGC‘s EPS will be impacted by 3-5%  for every dollar decrease in oil price. If ONGC share 33% of under-recoveries on cooking fuels, assuming no under-recoveries in retail fuel, then at $52/bbl, its under-recoveries would be Rs 53bn which would reduce its net realisations by 16% to $44/bbl.

RIL is also impacted by the direction of gross refining margins. Every dollar movement impacts its EPS by Rs 10. RIL is least impacted as its share from production of gas will increase going forward.

GAIL‘s petrochemicals business could be impacted negatively with EPS declining 0.6% for every $1/bbl decrease in crude price.

Approx. one-third of L&T’s business comes from hydrocarbon business. With oil prices below $50/bbl, clients might start re-evaluating the feasibility of the projects which will lead to either cancellation of orders or re-negotiation of price. Some respite for L&T could be ONGC’s plan to invest $5.3bn in gas finds by 2013. But L&T can only bid for shallow water projects as it lacks deep sea projects capabilities.

66% of order book of Punj Llyod comes from Oil & Gas and petrochemicals sector and more than 70% of order book comes from overseas. Punj Llyod has a history of contractual disputes (IOC-PIL, GAIL, Petronet, SABIC).

Aban Offshore is impacted due to higher supply of rigs coming into the market with a declining demand for rigs as E&P projects is not viable with crude below $50/bbl.

I would avoid all the above stocks (except RIL) till crude price recovers to $50/bbl on a sustainable basis. I think crude price are not going to rebound to $50/bbl in the next six months (maybe a year). As for Oil Marketing companies (OMCs), it is more of a trading play than a long term bet as it is dependent on govt. policies.

CRAMS players like Divis and Dishman Pharma might be one of the beneficiaries as their raw materials constitute of oil derivatives.

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One response to “Oil below $50/bbl: Companies at risks

  1. Too difficult to decide whether to invest or stay away.
    Investing in these companies is essentially a bet on crude prices.

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