>Oil Sector (ENAM Securities)

OIL SECTOR

Given the highly uncertain global enviroment, we have looked at different oil price scenarios and the resultant impact on the sector

# Oil between USD 50-60/bbl: ONGC realization rises, Under-recoveries begin to burden PSU ONGC realization rises, Under-recoveries begin to burden PSU OMC's

# Oil > USD 60/bbl: Pvt sector booms; PSUs under pressure from mounting under-recoveries

# In line with deteriorating demand fundamentals, we have reduced our crude oil price forecast to USD 53/bbl (from USD 55/bbl) for CY'09 and USD 60/bbl (from USD 65/bbl) for CY'10.

OMCs clear gainers

# Negligible under-recoveries in FY10 if crude oil lesser than USD 50/bbl

→ Over-recoveries on auto fuels to largely compensate under-recoveries on kerosene and cooking gas

→ Every USD 1/bbl fall below UD 49/bbl, translates into over-recoveries of Rs 34 bn to OMCs in case of no fuel price cuts.

# Serious impact on ONGC bottom-line only in case crude remains below USD 45/bbl

→ Rupee depreciation will limit fall in crude oiul realisation in rupee term

→ Cairn valuation more vulnerable in case of falling crude oil price as NAV gets hit

# Further triggers could be de-regulation and easing liquidity issue for OMCs

PSUs remain good defensive bet; switch from HPCL/CAIRN to IOCL/BPCL/ONGC

# Among OMCs, we prefer IOCL/BPCL vs HPCL due to better earnings visibility and lower vulnerability to high crude prices

→ IOCL benefits from high pipeline and investment income while BPCL benefits from high share in auto fuels market

# Among upstream, we prefer ONGC due to attractive valuation and relatively stable earnings

De-regulation of auto fuels could lead to re-rating of PSU oil pack

# In short term, may limit OMCs over-recoveries on auto fuels.

# But more visibility on earnings front going ahead

Strong balance sheet for ONGC; while liquidity problems easing for OMCs

# Issuance of oil bonds by the GOI and creation of SMO window by RBI has reduced liquidity problem for OMCs

# Fall in crude oil prices has further reduced working capital requirements

To see full report: Oil Sector