Tuesday, March 20, 2012

Crude Oil Cess impact on Oil Companies

Higher international crude prices since the start of 2012 have kept the shares of oil producing companies specially Cairn, ONGC and Oil India, buoyant on the hope of better realization. But budget 2012 brought surprise for these companies and investors. 

The finance minister seemingly wanted a share of the pie. The cess on crude got increased from Rs 2,500 a tonne to Rs 4,500 a tonne. This effectively means a decline of $5 a barrel in crude oil realisation. While this will add Rs 7,500-8,000 crore to the government’s kitty, the cess will negatively impact earnings of companies like ONGC, OIL and Cairn. Deutsche Bank estimated the negative impact on earnings at 15 per cent for Oil India, nine per cent for ONGC and seven per cent for Cairn India.

The current cess hike adds to the pain of govt. owned OIL and ONGC which are sharing a major part of subsidy burden of selling the fuels at a prices below the cost of production. The actual government subsidy for FY12 would be Rs 85,000 crore and the subsidy share of upstream companies would be close to 40 per cent.

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