Oil consumption growing; investors not worried about EV, shale gas substituting oil: Vikas Halan, Moody’s

BPCL is very attractive for those companies which want to ensure that they have access to a market that is going to continue to consume oil in 20 years, says Vikas Halan, Senior Vice President, Corporate Finance Group, Moody's Investors. Excerpts from an interview with ETNOW.

Bond yields are indicating that we are in a liquidity crunch. Even though RBI is maintaining that liquidity is back., the bond yields both in the corporate bond and government market are stubbornly resilient. Why is that?
The bond would react to a lot of factors, not just RBI interest rate cuts. Globally, investors are staying on the sidelines. We are seeing that investments in credit is also a bit circumspect and it is playing out similarly.

It is not just the central banks that are cutting down rates and having transmission immediately. There is also the expectation of credit risk. We do not know how sound a company is in terms of liquidity and therefore you add a lot more premium over and above the risk-free rate. Therefore, the rates are not getting lower.

The market is waiting for divestment. How are you rating assets of Indian refiners right now? BPCL road show is supposed to begin this month. Would there be a lot of foreign takers for BPCL assets?
Yes. BPCL is a very interesting asset because it has got a very large chunk of emerging market share. When you look at other big emerging markets like China or Latin America, they already have their national oil companies and at the moment, there is no plan to divest. If you are a company that has got a large upstream production and if you look at environmental risks and carbon transition risk over the next 10, 20 years, BPCL is very attractive for those companies which want to ensure that they have access to a market that is going to continue to consume oil in 20 years.

BPCL would definitely get a lot of interest but a lot of issues need to be resolved before the actual sale happens. The government has already mentioned that they are selling or hiving off the Numaligarh refinery. But there are a couple of other things as well which a buyer would need to look at before they make the decision.

One has to do with BPLC’s stake in Mozambique -- whether somebody coming in would want to buy or sell it off. Then you have got the whole LPG business which is still subject to subsidy. If a private player comes in, why would they sell LPG at subsidised prices? Why would they wait for the government to give them reimbursements? The government needs to untangle that web effectively.

Also, BPCL has a lot of outstanding bonds which have a change of control clause. They need to be addressed before a buyer can come in. It will take a lot of time in my view before we actually see the execution happen.

The other thing is whether we have a clear hang of the fuel retail policy? There is no price hike when there are state elections. Is that going to be the biggest deterrent?
Absolutely. I mean that is one of the things that we could possibly see as a fallout of this privatisation that the government will possibly take their hand off the pricing policy. They will not probably guide the oil companies going forward if the privatisation actually happens because you cannot have 30% of the market pricing it at a higher level and 70% of the market which will be controlled by the government at a lower price. Whoever is buying it, would go into that diligence process, with the government regarding how that pans out.


What happens after BPCL? What happens to HPCL, ONGC? The government recently said they do not need to be in the oil business. How do you see things evolve?
Yes, it is positive that the government is trying to get out of the oil business but if you look at emerging markets, the governments continue to remain in the oil business. In Thailand, Indonesia, Malaysia, the distribution is not yet privatised. The distribution is very much in the hands of the government. So, India is going to be pretty much an experiment if distribution goes into private hands. It will be interesting to see what happens. But after this, it will depend a lot on how the BPCL disinvestment actually pans out. HPCL happened but it was just sold to ONGC. Five years from now, depending on how BPCL privatisation pans out, the future trajectory of the government policy on oil and gas will be determined.

What about the health of upstream companies like ONGC given the uptick in crude prices?
Most of the upstream businesses are doing well -- $60 and above is a very decent level for oil prices. For ONGC and Oil India, there is one added benefit. The government has not asked them to share any subsidy burden. That means their net realised prices at $60 is much higher than their net realised price when oil prices were $120 because they were sharing $60-$70 of subsidy. So, their health remains pretty good.

But we need to also look at the shareholder return because the dividends have been going up. The government has been asking them to do share buybacks. Also, if you look at the guidelines, these companies cannot maintain a large amount of cash. Otherwise, they will need to do share buybacks. So, it is a bit of an issue in the balance sheet. These companies used to have a lot of cash relative to their debt and now the cash relative to their debt has been coming down significantly. From that perspective, the balance sheet health has weakened, but operationally they continue to remain healthy at $60 a barrel oil.

When you are raising a 10-year, 20-year and 30-year bond, that is a good part with some of these companies being backed by the sovereign. But in the last five years, oil sector is getting disruptive whether it is electrical vehicles (EV) or shale gas. Do you think for someone who is now looking to raise long-term bonds may find it difficult?
That is something we are looking at over a 20 year horizon. EV is a very small portion. Oil is being used for petrochemical, aviation and large transportation. EV substitution has been very slow. It is not taking off demand but is probably slowing down growth. We still expect that the peak oil demand is not going to be reached before 2035 or 2040 even on a global basis. In emerging markets, it could be even beyond that.

India is expected to continue to grow even though April to October was a bit of an anomaly with only 1% growth. But in the past five years, it has been growing at 5%. Oil consumption continues to grow. If you look at investors, even we have seen oil companies doing bonds in 2019 which are 30-year and recently PTTEP in Canada did a 40-year bond. So, investors are not yet worried about oil being substituted.

This is what amazes me. One set of opinion says we see oil getting disrupted, the old refineries going to become junk and new technology is going to take over the way we drive and the way we commute is going to be different. Yet, you can raise 10, 20, 30, 40 year long term money in the bond market?
That is because if you go higher in the value chain in oil, the risk becomes a little less from an ESD perspective. If you look at pure crude oil producers, it is not only used in transportation but also has got use petrochemicals and other sectors, But at the refinery level, there is a lot of diesel and with growth of EVs, diesel consumption get disrupted. If you go further down, then you can expect that disruption, but if we go further up or even in natural gas, not so much. Natural gas is much cleaner than crude oil.

Which brings me to Aramco and their call of going from oil to chemicals. They are looking at Reliance Industries and perhaps BPCL as well. How would that play out?
Aramco is looking to diversify from just oil and if you get into petrochemicals, you are going into a non-polluting part of crude oil consumption -- crude oil application on advance plastics and not just single use plastic.

Aramco is setting its targets very carefully. Aramco is not just investing in India, it has just invested in Petronas in Malaysia, then in PT Pertamina and in Korea. Aramco is spreading its presence globally and especially in emerging markets where they know the demand is going to be there.

What did you think of the listing and the possible greenshoe option coming up?
I would say from an Aramco perspective, it does not move the needle that much. Yes, it is now a listed company and there will be a lot more information available but this is not the end game. In my view there is going to be a subsequent offering at some point when Aramco is ready for it and that is going to be the bigger part.