WTI crude oil price slump not to hit E&Ps profits

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With WTI crude oil touching the recent low of $76 per barrel on Oct 4, most of the investors are concerned that local E&P profitability would suffer in Fiscal Year 2011-12 as WTI is down five per cent in 2011. But, according to analysts, an interesting point was that Arab light crude, a benchmark crude for local E&Ps, was trading over $100 per barrel mark for last eight months and was up 20 per cent in 2011.
“This is primarily due to consistent demand for Arab light crude from two big economies of Asia including China and India,” said Nauman Khan, an analyst at Topline Securities.
However, the analyst said that in the short-term one might see the Arab light pricing easing amid prolonged global debt crisis. “We maintain our FY11-12 Arab light crude oil assumption at US$95 per barrel,” he said. Seeing no impact on the POL’s profits, Khan said that the company was expected to post impressive earnings growth of 20 per cent in FY11-12 with expected dividend yield of 11 per cent. Contrary to the perception that lower oil prices would affect the E&Ps in FY11-12, Arab light, which is more relevant for local E&Ps, remained firm over US$100 per barrel, the analyst said.
He said that currently Arab light crude was trading at US$107 per barrel versus the WTI price of US$ 87 per barrel, at a premium of $20 barrel to WTI. “We believe that this is a big anomaly as the former traded at an average $2 per barrel discount from WTI in last 10 years.”
To Khan, this change in relative pricing of Arab Light is primarily due to two important fundamental reasons.
“Firstly, strict environmental laws are deterring North American refiners from any major expansion and hence there is higher dependency on Middle East market by the largest oil consumer, the US.”
“Secondly, consistent demand from China, India and other growing economies closer to the Middle East is also boosting demand for Arab Light crude for their expanding refinery sectors,” the analyst viewed.
China, he said, was the biggest oil consumer and importer in Asia-Pacific with Middle-East oil now accounting for more than 40 per cent of the total oil imports whereas for India 72 per cent of the imported oil demand was met through Middle-Eastern oil.
“However, we believe that the prolonged global debt crisis would somehow affect overall global oil demand and hence Arab light prices may gradually fall below $100 per barrel,” said Khan forecasting that during FY11-12 the Arab light crude oil would be priced at $95 per barrel, slightly higher than last year’s $93 per barrel.
On account of improved net realised hydrocarbon prices and improved volumetric production POL’s topline was expected to post an impressive growth of 32 per cent to stand at Rs2.9 billion in the first quarter of FY11-12 as compared to Rs2.2 billion of last year, the analyst said.
“Thanks to higher oil prices (up 46 per cent), companies net revenues are expected to grow by 26 per cent to Rs6.8 billion.”
He said though operating expenses to remain slightly higher, 48 per cent jump expected in other income (primarily earned on higher bank placements) was also expected to support the bottom-line.