25 Feb 2013
OIL & GAS
INDIA ENERGY: Proposed refinery transfer price change negative
for refiners; implementation will be at the cost of (a) closure of
refineries impacting product supplies or (b) alternate
compensation mechanism for refiners; hence difficult to
implement
‐
Indian Oil & Gas sector is currently undergoing significant change and clarity is
unlikely to come in near‐term. During this flux, as expected, there will be many
positive as well as negative news flow which will have meaningful likely impact
on the underlying companies. However, we believe that the underlying theme of
recent diesel reforms is to (a) price petroleum products in‐line with market, (b)
improve financial situation of government and oil companies so as to empower
companies to tackle country’s Energy Security needs (to the extent possible) and
ensure adequate supplies in view of strong demand growth.
On the various likely policy decisions, recent media articles indicate that the
Indian Finance Ministry, in its efforts to reduce under recoveries, has proposed
to shift the pricing methodology of auto fuels from current ‘Trade Parity’ basis
to ‘Export Parity’ basis. However, Petroleum Ministry is opposing this move as
this would impact the profitability of many refineries and would also result in
losses for some.
‐
Our View
‐
We believe that the proposed change will be difficult to implement given the
low profitability of PSU refiners. The combined PAT of all oil PSU’s (HPCL, BPCL,
IOCL, MRPL and CPCL) was only INR 145b during FY12 v/s proposed likely impact
of ~INR150b. The impact on private refiners (RIL and Essar) could be to the tune
of INR30b (RIL EPS impact of ~7%).
‐
However, in the worst case, if Finance ministry is successful in pushing through
this change, then the government will have to think of some alternate way to
compensate the refineries for these losses. As closure of refineries would mean
inadequate product supplies in the country and just for the sake of short‐term
fiscal problem, we do not think government will undertake such a harsh step.
‐
The ongoing diesel reforms are positive for the sector and for OMC’s would
likely result in the 10‐25% savings in interest cost over the next 2 years leading
to higher earnings. In OMC’s, BPCL is our top pick due to its E&P upside
potential.
Where is this pricing methodology used?
‐
This pricing methodology is used to decide the ‘Refinery Transfer Price’ i.e.
selling price of petroleum products (petrol/diesel) from refineries to marketers.
E.g. the pricing of diesel/petrol sold by MRPL/RIL/Essar/CPCL to OMC’s
(HPCL/BPCL/IOCL) is based on ‘Refinery Transfer Price’.
What does the proposed change in methodology mean?
‐
The current pricing methodology i.e. Trade Parity is calculated as weighted
average of Import Parity and Export Parity in the ratio of 80:20.
‐
The change from Trade Parity to Export Parity will reduce the product pricing as
the notional benefit of freight and import duties (part of Import Parity Pricing)
will not be available in the Export Parity pricing (refer the exhibit below).
1