ICICI Securities on Wednesday said the recent weakness in the rupee would have material but mixed implications for oil & gas companies.
The brokerage expects a positive impact on upstream players and, to a smaller extent, on Petronet LNG and Reliance Industries (RIL), while a negative impact is likely for oil marketing companies (OMCs) such as IOC, BPCL, and HPCL, as well as gas companies.
For OMCs, ICICI Securities said rupee depreciation helps refining margins to a small extent as GRMs and realisations are traded in dollar. The impact on retail margins is more material, since daily pricing changes are frozen as of now.
Gas companies see a hit on gas costs with costs priced in dollar/ realisations in rupee, and 50-51 per cent of gas requirements of city gas distribution (CGDs) being met via LNG.
“Similarly, Gulf Oil may also see a hit, with higher LOBS prices in rupee – not necessarily being passed on in full,” ICICI Securities said.
For OMCs, ICICI Securities said every Re 1 depreciation against dollar could improve the refining sector’s gross earnings by 1 per cent, – with the current exchange rate being Rs 88, implying a 2 per cent impact over base case of Rs 86.
“However, this positive is more than offset by the material hit to retail margins, which change by Re 0.5 per litre for every Re 1 depreciation. Overall, therefore, integrated margins dip by Rs 0.3 per litre for every Re 1 depreciation and the EPS impact is 11 per cent for the same for OMCs,” it said.
In the case of upstream companies, the rupee depreciation does have a positive impact – every Re 1 leading to a 1-2 per cent appreciation in EPS for the standalone business. That said, ICICI Securities believes the consolidated EPS impact would be mixed for ONGC
and OIL India.
“While ONGC should see a moderation in its consolidated EPS due to HPCL’s EPS tumbling 11 per cent for every Re 1 depreciation. Oil India may see upside, as its subsidiary, Numaligarh Refinery, will likely benefit from the higher GRMs earned in rupee,” it said.
For gas transmission companies, GAIL and GSPL, there is limited impact on the core business from the rupee depreciation as the tariff determination is in rupee terms. Even if there is a fluctuation in gas costs, transmission margin would not be impacted, ICICI Securities said.
For city gas distributors, the impact on gas costs would be meaningful.
“Our sense is Re 1 deprecation could dent EPS by 4-11 per cent, assuming the higher effective gas costs cannot be passed on,” the brokerage said.
For RIL, while the rupee depreciation does have inflationary impact on crude cost and higher cost of procurement of LNG and ethane (for the refinery complex and for petchem), improved realisations for the refining, petchem and upstream segments keeping the impact to a minimal at 1-1.3 per cent.