Petroleum products price hike

Finally, government bit the bullet and increased diesel, kerosene and LPG cylinder prices on Friday evening. It was long overdue though. Market gave big thumbs up to government oil price hike. It looks like suddenly market has woken upto Oil marketing companies (OMC), Oil PSU’s like ONGC. Lot of upgrades are coming in with buy and overweight rating. Oil prices fell sharply last week by 8%, mainly on account of release of strategic oil reserves of 60 million barrels over next 30 days by members of IEA. This sudden fall in price is also helping OMC cause. As things stand now, OMC’s are not losing any money on petrol sale. Loss on other oil products like diesel, kerosene has also been reduced by price hike and duty rationalization.

But, I feel more confident about ONGC than OMC’s. I think ONGC has seen its bottom at Rs. 248 this year. Although an irony, but its a fact that in current scenario, oil price fall benefits upstream company like ONGC more than its rise. ONGC suffers from adhoc subsidy sharing formula of government. In case, government gives some clarity on subsidy sharing, share price should easily move past Rs. 300. Follow on Public Offering (FPO) also remains overhang on the stock. Its scheduled date was July 5, but note sure if less than 300 is the fair price and government should go ahead with it.

It looks like ONGC is having its way in Cairn-Vedanta deal. Royalty payments will be made cost-recoverable which will be positive for ONGC.

I wrote few ONGC July series 240 puts yesterday. These puts will yield 5.81% in 32 days. Considering all the scenarios, I don’t think ONGC share will fall below 240 in July series.


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