Bongaigaon Refinery and Petrochemicals Ltd’s March quarter results, announced on Wednesday, show that profit before tax and exceptional items increased by 137%, compared with the same period of 2006, in spite of a 19% fall in net sales. The lower sales were due to lower capacity utilization because of lower availability of Assam crude oil. Higher refining margins, however, more than made up for the decline in sales. Earlier, Chennai Petroleum Ltd posted a year-on-year net-profit growth of 434%, on the back of a 3.9% rise in net revenues.
In the past month, the stocks of pure refiners, such as Chennai Petroleum and Bongaigaon Refineries, have moved up 17% and 27%, respectively. Even Reliance Petroleum Ltd shares have jumped up from around Rs74 a month ago to Rs91, although the refinery is supposed to be commissioned in December 2008.
Stocks of refining-cum- marketing companies, such as Indian Oil Ltd, HPCL and BPCL, have also been going up, as has the Reliance Industries scrip.
The main reason: higher refining margins. While crude oil prices have been kept in check, the price of petroleum products has gone up. That increases the margins of refiners. This was apparent in the RIL results, with gross refining margins going up as high as $13 (approx. Rs533) a barrel in the last quarter. RIL’s complex refinery is able to extract much higher margins than most other refineries on account of its ability to process heavier crude with high sulphur content. Chennai Petroleum reported gross refining margins of $6.42 per barrel in the March quarter, well above the $2.95 it was able to get in the December quarter.
But that is history. The market is more interested in what refining margins will be going forward. Refining margins have reached a new high this month on the back of strong demand, on the one hand, and the closure of several refineries for maintenance, on the other. The International Energy Agency’s Oil Market report says: “Seasonal refinery maintenance and a spate of unplanned outages is expected to depress global throughputs. This implies that, with demand increasing in June, there will be a further tightening of product stocks.” In other words, refiners will post fat profits in the first quarter of fiscal 2008.
Also, analysts point out that capacity additions will take time to come on stream because of delays in project implementation. Moreover, complex refineries will benefit even more, because the differential between light and heavy crude prices is expected to increase, which is good for complex refiners that can refine heavier crudes, as they can save on costs. Reliance, Chennai Petroleum and some units of Indian Oil will gain.
Yet another boost to oil refining and marketing companies has come from government policy, which has placed a higher burden of subsidy on the upstream oil producers. This policy, plus a generous supply of oil bonds in fiscal 2007, has limited the subsidy burden on the oil refiners and marketers.
And finally, brokers have not lost the opportunity to re-rate Reliance Petroleum, on the basis that it will have even higher refining margins than Reliance, that Chevron may increase its stake in the company and because, with Reliance’s proven project management skills, they expect the unit to be commissioned well before the December 2008 deadline.