Time To Shift To Upstream Oil Companies, CLSA Says

State-run oil refining companies, including Oil & Natural Gas Coporation Ltd. and Oil India Ltd., are likely to see an improvement in realisations and production with the Organization of the Petroleum Exporting Countries (OPEC) extending production cuts for nine months, according to a CLSA report.

Consequently, the brokerage house says it’s time to "shift from the well-owned downstream space to the unloved upstream".

CLSA expects downgrade in earnings per share of oil marketing companies – Indian Oil Corporation Ltd., Hindustan Petroleum Corporation Ltd. and Bharat Petroleum Corporation Ltd. – by 9-29 percent, citing rising competition from private players and pectre of lower oil demand growth.

Bullish On Oil Explorers

• The brokerage house sees a rebound in volumes for ONGC and Oil India after crude production ended at a three-year high.
• Production delivery by ONGC and Oil India may be a positive surprise for investors.
• ONGC will shell out close to Rs 28,300 crore to acquire the government's stake in HPCL.
• CLSA had earlier reported ONGC could also sell its stake in IOC to fund the HPCL buyout..

Bearish On Oil Marketing Companies

• Broking firm expects slowdown in Indian Oil (IOC), Hindustan Petroleum (HP) due to rising competition from private players.
• Overall marketing volumes for IOC and HP declined 2.8-5.3 percent.
• CLSA says unless volume growth rebounds strongly, these numbers will be seen as disappointing for OMCs.
• Downstream companies may raise marketing margins to negate a potential earnings per share risk of 7-13 percent from GST.