Refiners, cos upstream, soar on windfall tax cuts; CPCL up 11%, Oil India up 8%

Shares of oil and gas companies jumped up to 11% on BSE in intraday trading on Wednesday after the government cut the windfall tax on domestic crude oil production from Rs 23,250/tonne to Rs 17,000/tonne. The government has also reduced the extra excise duty on diesel and ATF exports by Rs 2/litre and the extra excise duty on petrol has also been removed.

Among individual stocks, Chennai Petroleum Corporation (CPCL) rose 11% to Rs 296.40, Oil India gained 8% to Rs 201.80, followed by Oil and Natural Gas Corporation (ONGC) up 7% to Rs 136.40.

Mangalore Refinery & Petrochemicals (MRPL) was locked in the upper circuit by 5% at Rs 76.30, Gail (India) was up 5% at Rs 147.30 and Reliance Industries gained 4% at Rs 2,545 on the ‘BSE in early trading today.

By comparison, the S&P BSE Sensex was up 1.2% at 55,405 points, as of 9:18 a.m.

Most oil and gas stocks had corrected up to 45% from their respective 52-week highs reached in June, after the government imposed a windfall tax and additional excise duties on diesel exports , gasoline and ATF.

“After some moderation in product cracks in July, the government has reduced excise duties on fuel exports. This will benefit refining companies. The new excise duty changes will come into effect from July 20 The windfall tax has been reduced from ~US$40/bbl to ~US$29/bbl taking into account the recent trend in world oil prices The windfall tax reduction bodes well for companies oil producing companies,” ICICI Securities said in a note.

While in absolute terms windfall taxes are still high, we believe that continued normalization of local fuel availability (a major concern for government energy security), stable oil prices, More normalized global fuel margins and currency stability will further reduce windfall taxes. as part of the biweekly review, Morgan Stanley analysts said in an industry update.

Reliance, Oil India and ONGC will see their surplus shrink, and equity valuations should start pricing in high sustainable energy margins as the government’s intent becomes clear, he said.

“We believe RIL should be priced at sustainable refining margins of $13-15/bbl while ONGC at $75-80/bbl oil and $6/Mbtu feedstock. Both should imply a 25-40% rise in equities as energy markets are expected to remain stretched despite ongoing oil volatility and global fuel margins shrinking from record highs,” said the brokerage house.

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