In an interview to CNBC-TV18, Gagan Dixit, Oil Analyst at Quant Broking said, if export parity is implemented then it would impact gross refining margins (GRMs) of oil marketing companies (OMCs) by USD 2-2.50/barrel.
"It will be boost for refining margins of these companies. Historically, they usually reported around USD 4-5 GRMs. If it goes through, then their refining businesses will be able to save around 50 percent of the refining profit," he added.
A committee headed by former member of the Planning Commission Kirit S Parikh, has been formed to suggest a methodology for pricing of diesel and cooking fuel. The report on the same is likely next month. The government is looking to alter the way these are priced to reduce its subsidy burden, which appears to be going out of its control due to the falling rupee.
Currently, diesel is priced at trade parity, of which 80 percent is import price and 20 per cent export rate. Kerosene and LPG are priced at import parity.
Dixt prefers downstream PSU stocks and is bullish on BPCL at current levels.
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Below is the edited transcript of Gagan Dixit's interview with CNBC-TV18
Q: How do the numbers stack up do you think for ONGC itself, what is the profit petroleum according to you at this point in time and therefore if it is 85 percent subsidies and 15 percent profit, are you better off or worse off on ONGC?
A: I don't have the copy of the draft report, but if I go as per previous comments of ONGC's MD, whenever crude prices go above USD 100 per barrel then they are asking for 85-90 percent subsidy payment and keep the remaining. If that is the scenario then this is fine, this is also agreeable with upstream public sector undertakings (PSUs).
Q: The current draft also recommends the extension of trade parity pricing and perhaps we may not see export parity pricing, in your mind how much would this impact both the oil marketing companies (OMCs) as well as upstream?
A: From trade parity to export parity pricing, if it was implemented then it would possibly impact OMC's gross refining margins (GRMs) by around USD 2-2.5 but now it is going to continue. So, that it will be boost for their refining margins. Historically, they usually reported around USD 4-5 GRMs. So, refining business will be able to save around 50 percent of the refining profit.
Secondly, as per Kirit Parikh committee recommendations, they are primarily focused on diesel deregulations. So, this trade parity, export parity, import parity don't matter if diesel gets fully deregulated just like gasoline. Then there is no requirement for calculation and it would be the market that would define what should be ideal price. That is the whole idea of this Kirit Parikh recommendation.
Q: What is your take on Bharat Petroleum Corporation Ltd (BPCL) itself? There is a whole host of news to react to?
A: As far as their Brazil discoveries are concerned, it is too early to price the value of those. Typically, when we see discoveries, there should be actual discovery about drilling the well and there is an appraisal programme that will take two-three years. After that the price of diesel is established.
Currently, as per media report, the regulator in Brazil has come out with a report that there is a huge potential. It is similar to 10 years ago when DGCA came out with a report saying that there is a huge potential in the KG basin, but ultimately the actual price of any discoveries in the KG-D6 block established after Reliance made discoveries.
That usually takes four-five years. So, it is too early to say that there is a potential. If they find like one billion barrel in future and if we take BPCL's stake of 20 percent then around 250 million barrel at USD 8-10 per barrel reserve valuation gives something around Rs 150-200 per share value. But, at this point, I cannot price that potential until unless it can be established by successful exploration programme.
