Oil cos profitability to remain weak in 2017: Fitch

Oil cos profitability to remain weak in 2017: Fitch

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Oil cos profitability to remain weak in 2017: Fitch
New Delhi, Nov 30 (PTI) Fitch Ratings today said natural gas prices in India remain unattractive towards drawing large investments despite liberal exploration terms and higher rates for difficult discoveries.
In a report ‘2017 Outlook: Indian Oil & Gas’, Fitch said India’s petroleum product consumption will remain strong at around 5-6 per cent in 2017 but the profitability in the oil and gas exploration and production segment will remain weak.
“We believe gas prices remain unattractive towards drawing large investments despite a new hydrocarbon exploration licensing policy that eases regulations, and the government allowing higher gas prices for deep and ultra-deep water and difficult fields,” it said.
Fitch expected the operating environment to remain challenging for Indian upstream companies in 2017 at its oil- price assumption of USD 45 per barrel, and low natural-gas prices.
Stating that it did not expect any major improvement in profitability at Oil India Ltd and upstream operations of Reliance Industries Ltd, it said that most domestic gas fields are likely to make losses in 2017.
“Without a change to the pricing mechanism, Fitch does not expect a significant improvement in gas prices. At the current gas price of USD 2.50 per million British thermal unit in India, OIL can only recover the cash costs of bringing the gas to the surface, but not the production levies, taxes, and sunk costs,” the report said.
Fitch, however, said it expects upstream oil companies to continue investing in their current portfolio to maintain production and improve efficiency.
On fuel consumption, it said India will see a strong growth of around 5-6 per cent in 2017. “Consumption increased by 8 per cent during the first half of 2016-17 fiscal (six months ended September 30, 2016), compared with 10.9 per cent in FY16,” Fitch said.
Fitch also expects gross refining margins of all Indian oil refiners to narrow in 2017, while remaining stronger than the historical levels prior to FY16. “This, together with higher volumes, is likely to support strong operating cash flows in 2017. Therefore, we expect these entities’ credit metrics to stay in line with their current standalone profiles despite their large capex in the medium term.” It expected no discounts and under-recoveries (the difference between market prices and state-controlled selling prices) on kerosene and liquefied petroleum gas (LPG) to be borne by state-owned upstream oil companies or the three state-owned oil marketing companies (OMCs), in FY17 and FY18.
“Fitch believes the gross refining margins (GRM) of all Indian oil refiners will shrink in 2017, from the strong levels in 1H16. However, Fitch expects GRMs to remain stronger than the historical average; investments to expand refining capacity and complexity is enhancing GRMs for most of the rated issuers,” the report said.
This, together with higher volumes, is likely to support strong operating cash flows in 2017. (MORE) PTI ANZ MR
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