Shares of oil and gas companies saw a steep fall on Friday following the government’s move to levy duty on exports of auto fuel and impose a windfall tax on domestically produced crude oil.
Reliance Industries stock closed 7.19% lower on Friday, seeing an intraday decline of more than 8%. ONGC and Oil India shares ended over 13% and 15% lower respectively on the BSE.
“Export taxes, restrictions and windfall taxes on oil producers are a global trend and highlight the tightening energy market outlook,” said analysts at Morgan Stanley Research in their report. As per the analysts, India’s announcement is incrementally negative for sector valuations.
ONGC is most negatively impacted, while Reliance Industries can manage the changes comparatively better, analysts said.
The government has imposed a special excise duty of ₹6 per litre on exports of petrol and aviation turbine fuel (ATF) and ₹13 per litre on exports of diesel. This, as per analysts, is expected to impact refiners and exporters such as Reliance Industries and Nayara Energy (Vadinar refinery).
It is the gains that these refiners were likely making while exporting refined crude products, that may have prompted the government to impose the taxes. Reliance Industries was seeing regular upgrades aided by strong and improving outlook for its oil to chemical business mainly led by strong refining margins.
The government’s move to levy a cess of ₹23,250 per tonne on domestically produced crude oil may impact the earnings of state-owned oil producers such as ONGC Ltd, Oil India Ltd and private sector Vedanta Ltd. With crude prices above $100 a barrel, the producers too had been making extraordinary profits.
“Gasoline and diesel are the key contributors to Reliance’s refining slate contributing 72% of refining throughput,” as per analysts at Jefferies India Private Ltd. They estimate $7 a barrel blended impact on RIL excluding any exemption. “With ~58% of RIL’s refined products being exported, the blended impact for Reliance could be ₹3.4 per litre translating to $7 a barrel impact on realized Gross Refining Margins,” said analysts at Jefferies India Pvt Ltd in their report. Nevertheless, excluding the SEZ refinery, (if exempted), the impact on RIL’s GRM would be just $1 per barrel.
The impact on state-owned oil and gas producers ONGC and Oil India is likely to be much more. Vedanta Ltd may see some impact on earnings due to higher taxes, but it is a producer of multiple natural resources and oil and gas production through its subsidiary Cairn India contributed only about 10% to revenues and 13% to Ebitda during FY22. Not surprising, Vedanta share prices declined just 4.04% compared to the steeper fall seen in stock prices of ONGC and Oil India.
Higher cess on domestic crude production of $40 per barrel for ONGC and OIL India was a negative surprise and should imply downside risks for the sector, said analysts at Morgan Stanley Research. It impacts ONGC and OIL India earnings for FY23 by 36% and 24%, they said.
Higher margins that oil and gas companies were enjoying due to elevated crude prices and gross refining margins (GRMs) should normalize now, said analysts. As the sector tailwind is gone, stock prices are getting adjusted to the new reality, said Manish Jeloka, co-head of products & solutions, Sanctum Wealth. Once the impact of news is over, the medium-to-long-term returns will depend on company-specific fundamentals, added Joleka
Analysts were surprised by the government’s sudden move. An analyst at the domestic broking said that government has not specified any duration for these taxes. Further, there are no slabs as to at what level of crude prices the taxes are available, since the prices may not remain elevated forever, added analysts.
“No sunset date has been specified though we believe this is an extraordinary measure given the inflated profit environment in refining today,” said analysts at Jefferies India Pvt Ltd.
Revenue secretary Tarun Bajaj on Friday said the government will review the windfall tax on petroleum and the duty on auto fuel export every 15 days for recalibration.