Oil stocks Outlook for the week – 18 to 22.08.2014

Oil stocks Outlook for the week – 18 to 22.08.2014

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With the outlook for state-owned oil marketing companies improving due to declining
subsidies, their shares are likely to remain on the upward trajectory next week, though the
broad market trend and movement of the rupee against the dollar will continue to have a

Revenue loss on diesel is likely to have declined from the last revised figure of 1.50
rupees a litre. If the current trend in crude oil prices and that of the rupee against the
dollar continue, the fuel is likely to inch very close to market parity within a month or

The Indian currency recovered this week and ended at 60.76 a dollar. Further gains in the
rupee could add to the upside in shares of Indian Oil Corp, Bharat Petroleum Corp and
Hindustan Petroleum Corp. Full diesel deregulation will lead to lower interest costs and a
potential doubling in marketing margin.

Also, timely payment of subsidy by the government in the past few quarters has
improved the financials of these companies by reducing their borrowings, and
consequently interest costs.

We expect the company (Indian Oil) to get fully compensated from the government and
upstream companies in FY15 and FY16 and its subsidy burden to remain nil, which
would drive growth for the company.

The improvement of financial health of the oil retailers will also bring in some cheer to
the upstream companies, who have to share 40-50% of the revenue loss on subsidised

Another major trigger for Oil and Natural Gas Corp and Oil India will be revision in gas
prices. Oil Minister Dharmendra Pradhan said in parliament this week that the new gas
price formula will be finalised by Sep 30.

We believe ONGC can be the biggest beneficiary of under-recovery reduction. Gas price hike could be another trigger.