Financial Daily from THE HINDU group of publications
Tuesday, Aug 30, 2005
Industry & Economy - Petroleum
MFs keep away from oil stocks
Bangalore , Aug. 29
MUTUAL funds have now begun staying away from oil stocks on concerns over earnings with international prices testing $70 a barrel.
"For the moment, we are not picking up any oil stocks and will wait for the Government's decision," some of the fund managers said adding that the decision was also influenced by oil companies' refinery margins, which are under pressure.
Refinery margins pertain to the difference between the cost of crude and the value of the products. The margins also reflected by the crack spread (the spread created when purchasing oil futures and offsetting the position by selling gasoline and heating oil futures) applied to individual products. Fears are that if the hikes in international prices were not passed on in the form of the increases in product prices, oil companies' earnings were likely to be under severe pressure.
Almost all the major mutual funds have substantial portfolios of the public sector oil refining and marketing companies. In fact, companies have already warned of losses during the second quarter of this year.
Industry sources said the losses were largely on account of under recoveries in the diesel and petrol. The under recoveries are estimated to be close to Rs 15,500 crore. This was on account of the increase in the Dubai prices, to which the bulk of India's oil imports are linked. At least 60 per cent of the imports are made on a country-to-country basis, with the prices linked to the Dubai spot prices, which reflect the high sulphur crude prices. Indian imports are mostly of the medium and heavy sulphur crudes, unlike Western European and American refineries' that import mostly the low sulphur crudes, the sources said. But even the Dubai crude prices are currently close to $60 a barrel putting pressure on the companies' input costs.
The under recoveries implied that the product price increases have not kept pace with crude price leading to deficits. This was expected to manifest in reduced earnings of oil companies.
The SBI Mutual Fund Managing Director, Mr P.G.R. Prasad, said: "Unless the crude prices are passed on, we are not very optimistic about oil companies' earnings."
The sources said the longer the price increases deferred, the higher would be the hikes. A steep hike, they said, could not be staved off since the prices have remained high since the beginning of the financial year with no sign of any retreat. Initially, the expectation was the price increases were driven by hedge funds, but the industry sources said that most of them had reconciled to high crude prices for the time being.
Accordingly, if earnings come under pressure, most of the funds, especially those that are heavy weight on oil stocks are likely to see dips in the net asset values. This is a situation that most of them preferred to avoid.
As a result, instead of resorting to any form of major selling of the energy stocks, they have decided to restrict any build up of these portfolios, the sources added.
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