State-run Oil and Natural Gas Corporation Ltd. and Oil India Ltd. face the increasing risk of the government requiring them to share the fuel subsidy burden as oil prices rise, according to Moody’s Investors Service.
The rating agency projects that fuel subsidies could be Rs 34,000-53,000 crore in this financial year—the highest since the year ended March 2015—if Brent crude ranges between $60 and $80 a barrel.
Last week, oil prices hit $80 a barrel, the highest in four years. Rising prices increase the government’s import bill as India relies on inbound shipments to meet 80 percent of its oil demand. That adds to pressure on the government’s finances.
“Due to widening fiscal deficit, ONGC and Oil India may be asked to bear a part of the government’s fuel subsidy if oil prices stay above $60 a barrel in the ongoing financial year,” said Vikas Halan, senior vice president at Moody’s.
If the state-run oil explorers are obligated to contribute the entire subsidised amount exceeding the government’s budgeted figure for 2018-19, it will constrain their net realised prices to $52-56 a barrel, according to Moody’s. This is marginally lower than $56 a barrel for 2017-18.
The government has budgeted for Rs 25,000 crore of fuel subsidies in 2018-19, leaving a shortfall of Rs 9,000-28,000 crore, the rating agency said. That could be met by ONGC and Oil India entirely, or in part, if the government increases the budget allocation for these subsidies, it said.
Analysts have not yet turned bearish on the stocks though. More than 97 percent of analysts tracked by Bloomberg rate ONGC either a ‘Buy’ or ‘Hold’. For Oil India, the comparative number is 86 percent.
That may be because oil explorers may be able to manage the burden. The net impact of the subsidy sharing would be manageable for the companies even if they are required to bear the entire shortfall between the budgeted and actual subsidy for the current financial year, according to Halan.