Reforms positive for Indian Oil&Gas; capex squeezes cash flow: Fitch

Fitch expects refining margins to narrow from 1H15 levels, although we expect margins to remain relatively robust in 2016. We also expect a high level of volatility in crude-oil prices, exposing refiners to inventory gains and losses during 2016.

Fitch Ratings says in a new report that low oil prices and price deregulation in India's oil and gas sector will have a positive impact on the rated companies in the sector, especially those engaged in oil refining and marketing.

Fitch expects the rated Indian upstream companies to benefit from lower discount requirements and greater clarity on the subsidy-sharing agreement with the state. These changes will also minimise the negative impact on their cash generation from lower oil and gas prices.

Fitch expects refining margins to narrow from 1H15 levels, although we expect margins to remain relatively robust in 2016. We also expect a high level of volatility in crude-oil prices, exposing refiners to inventory gains and losses during 2016.

The sector outlook for Indian oil and gas entities is negative in 2016. The benefits from the price reforms and lower global oil prices for refining and marketing companies will be offset by their large capex needs in the medium term, which will lead to negative free cash flows. However, the rating outlooks for 2016 are stable.