Stable outlook for oil and gas sector in 2012, says Fitch

Fitch Ratings today said its 2012 outlook for both public and private sector Indian oil and gas companies is stable despite various challenges, including the increasing fuel subsidy burden on public sector companies (PSCs) and an uncertain global macroeconomic environment.

The ratings agency links the ratings of oil and gas PSCs with that of the sovereign ('BBB-'/Stable) because of the strategic importance of the sector and the evidence of tangible financial support, and it does not expect any weakening of these ties given their role as the government's extended arm for policy implementation, these ratings are not likely to be affected.

Consequently, these companies' 'stable outlooks' reflect that of the sovereign, Fitch said in a statement.

On private sector companies as well the agency continues to have a 'stable outlook' based on current expectation of their earnings and capital expenditure. However, Some private sector companies' outlook could move to 'negative' if debt-funded capex steps up significantly, or earnings are significantly lower than projected, due to depressed global economic conditions.

While high crude oil prices and a depreciating rupee contributed to increased under-recoveries (caused where retail price is lower than market price), a lack of policy reforms still remains the key reason for the burgeoning under-recoveries.

There is also a lack of policy reform to improve timeliness of subsidy transfer to public sector oil marketing companies (OMCs). Since Fitch does not expect much fuel-pricing reforms in 2012, under-recoveries will remain high unless crude oil reduces significantly or INR appreciates.