Oil and Gas - Sector Update - December 2011 - ENAM

Burgeoning under-recoveries coupled with government & OMCs' inability to take significant hits would result in higher subsidy burden on upstream companies. We expect FY12 upstream subsidy burden at 54% versus historical and H1FY12 levels of 33%.

Upstream stocks under threat: We expect 17-44% YoY dip in FY12 EPS for ONGC & OIL due to higher subsidy burden. ONGC would receive partial reprieve due to higher profits from OVL and Rajasthan Block. Huge cash levels of ONGC & OIL would increase the risk of government pushing for cross-holding of PSU shares to adhere to its own divestment plans.

OMCs' valuations are attractive (especially BPCL) but fundamental concerns over cash crunch would remain in the interim. OMCs are trading near their lows of CY08.

Key Assumptions: Crude at USD 112/ bbl for FY12 & USD 105/ bbl FY13; USD/INR at 47.6 and 46.5 for FY12 & FY13.

Source : Equity Bulls

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