Diesel price hike credit positive for oil marketing firms: Moody’s

COIMBATORE: The move to de-regulate diesel prices is credit positive for all the three state-run oil marketing companies (OMCs), according to Moody's Investors Service, a division of ratings agency Moody's.

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"The authorization is credit positive for all three companies because higher diesel prices will reduce the amount of fuel subsidy they need to temporarily absorb until they receive a full or partial payment from the government," Moody's said.

Although it is unclear how much leeway the companies will get in determining the amount and timing of the diesel price revisions, the authorization marks the first time that they are able to raise prices, it said.

"This partial deregulation aims to reduce government subsidies paid to the firms and lower the companies' losses on fuel sales," said Rachel Chua, Associate Analyst, Moody's Investors Service. The government currently requires the three fuel retailers to sell diesel, kerosene and domestic liquefied petroleum gas (LPG) at government-set discounted prices. The government offsets part of their losses through direct cash subsidies.

All three government-owned OMCs share the risk associated with a largely ad- hoc mechanism for subsidy reimbursement. "The government provides little visibility on the companies' subsidy burden and only announces the final share of subsidies at the end of each year," Moody's said.

Typically, the government, the upstream oil companies - Oil and Natural Gas Corporation and Oil India- and the OMCs share the burden of these subsidies in varying degrees. There are interim allocations in each quarter but the final year-end number can be substantially different from that of the previous year.

"Although the government's announcement falls well short of a full de-regulation of diesel prices, it does provide the OMCs with somewhat greater leeway in raising diesel prices closer to market prices," Moody's said.

"We view this partial freeing up of diesel prices as a positive step for BPCL and IOC towards recovering the Rs. 9.6 per litre loss they incur on the sale of diesel. We expect BPCL's and IOC's credit metrics to improve as diesel prices rise," it said.

While OMCs are partially, and sometimes fully, compensated for the under-recoveries, there is usually about a six-month delay between the realization of the under-recoveries and the government's reimbursement of fuel subsidies. "The ability for companies to at least adjust prices will reduce their use of short-term borrowings to fund the under-recoveries in the interim, and lower their interest expense, which the government does not reimburse," Moody's said.

According to the Ministry of Petroleum and Natural Gas, the under-recoveries to the three OMCs have been rising over the past three years. For the nine months ending December 31, 2012 diesel composed 59% of the companies' total under-recoveries.

Courtesy: The Times of India.