Oil Price Spike to Hit Airlines, OMCs

Crude and gas producers to gain, with oil up 18 per cent since January

The 18 per cent jump in crude oil prices since January is making some corporate leaders jittery, especially from the aviation, cement and tyre sectors, as their input costs would shoot up substantially.

However, chief executives (CEOs) of oil and gas producing companies are hoping crude oil will go back to the heady days of $100 a barrel, so they can again make super-profits.

Analysts say rising crude prices would add to the bottom line of oil and gas producers like Oil and Natural Gas Corporation (ONGC), Oil India and Cairn India. “If crude prices are going to be in the range of $55-70 a barrel, it will be good news for ONGC. Even when prices were up at the range of $100 a barrel, our returns were always subjected to the element of subsidy. We were retaining only $40-47 a barrel, even during the high-price regime,” said A K Srinivasan, director, finance, of India’s biggest oil and gas producer, ONGC. Free pricing of diesel would help the company to reduce its subsidy burden.

Analysts said the recent increase in oil prices could negate the impact of a cut in domestic gas prices for ONGC.

“At $50 a barrel for oil, ONGC’s earnings could improve to Rs 4,500 crore from the December quarter,” said an analyst with Religare.

Rising oil prices would have a mixed impact on India’s largest private sector company, Reliance Industries, that earns significant revenue from refining, exploration and production of oil and gas. Analysts said Reliance would be encouraged to make additional investment in oil and gas if prices improve.

However, the gross refining margins and petchem margins of RIL could come under pressure, due to higher input prices. Similarly, the other oil refining and marketing companies — Indian Oil, Hindustan Petroleum and Bharat Petroleum — will also take a hit on GRMs (gross refining margins, the spread between the crude oil price and the selling price of refined products).

“A higher crude price would help us in executing all our projects. This includes further development of the Aishwarya and Barmer blocks. It would help in having a healthy return of about 15 per cent in dollar terms. However, this is not good news for producers working on shale formations and deepwater blocks, as it would become more expensive,” said Sudhir Mathur, acting CEO of oil and gas producer Cairn India.

Early this week, Bob Dudley, CEO of global oil giant BP, said in Istanbul that crude oil would remain in the range of $55-70 a barrel for the rest of the decade. Due to falling prices, oil projects worth $1 trillion had been cancelled across the world, he added.

In the past two years, low oil prices helped many Indian companies to substantially reduce their raw material costs. Cement and tyre companies, for instance. Sale of automobiles also shot up as customers splurged on cars and motorcycles. All the gain will be lost if petrol and diesel prices rise again and negatively impact automobile sales.

The biggest loser will be the aviation sector, recording double- digit growth in recent months. GoAir chief Wolfgang Prock-Schauer warns input costs are already up. “This trend is likely to continue.  It depends on how much tax is levied on fuel, our highest cost item,” he said in Hyderabad.

Analysts say a rising fuel price brings other risks for the sector. It could impact growth plans, including those to improve regional connectivity, and lead to deterioration in service quality.

Reference - http://www.business-standard.com/article/companies/oil-price-spike-to-hit-airlines-omcs-116101401056_1.html