Oil: inventory gains boost refiners’ margins

Gross refining margins got a boost on account of inventory gains, thanks to the rising oil price trend over the quarter


Reliance Industries Ltd’s (RIL) reported premium of $6.5 per barrel over Singapore GRM was the highest in the past eight years, according to the firm, and exceeded Street estimates by a good margin.
Reliance Industries Ltd’s (RIL) reported premium of $6.5 per barrel over Singapore GRM was the highest in the past eight years, according to the firm, and exceeded Street estimates by a good margin.

Inventory gains were the flavour of the season for refining firms.

The Singapore complex gross refining margin (GRM), a measure of the difference between the per-barrel price of crude and the value of products distilled from it, dropped to $5 a barrel in the June quarter, compared with $7.7 a barrel in the March quarter.

Still, the reported GRMs of Indian refining firms on a sequential basis fared better. However, these GRMs got a boost on account of inventory gains, thanks to the rising oil price trend over the quarter.

Adjusted for refining inventory gains, the GRMs of oil marketing companies (OMCs) were in the range of $4-5 a barrel, according to Spark Capital Advisors (India) Pvt. Ltd.

OMCs include Bharat Petroleum Corp. Ltd (BPCL), Hindustan Petroleum Corp. Ltd (HPCL) and Indian Oil Corp. Ltd (IOC). OMCs’ results beat Street expectations.

IOC’s operating profit increased by one-third, compared with last year’s June quarter. HPCL’s operating profit rose 17% year-on-year, while BPCL’s operating profit increased at a much slower pace of 3%.

GRM is a measure of profitability.

Reliance Industries Ltd’s (RIL) reported premium of $6.5 per barrel over Singapore GRM was the highest in the past eight years, according to the firm, and exceeded Street estimates by a good margin.

Most analysts expected RIL’s GRM to be $9.5-10 per barrel. But RIL’s GRM came in at $11.5 per barrel. The management indicated $2 per barrel can be attributed to gains from inventory, hedging and risk management. RIL’s stand-alone revenue fell 19%, reflecting the decline in the broader crude oil prices, while net profit rose about 19%. That was because of a 628 basis points jump in operating profit margin, a 3% decline in depreciation cost and an 18.5% rise in “other income.” A basis point is 0.01%.

Meanwhile, oil producers have had it tough what with oil prices languishing. As expected, net price realization of Oil and Natural Gas Corp. Ltd and Oil India Ltd declined 22% and 25% year-on-year, respectively.

Oil marketing stocks have outperformed the Sensex so far this fiscal, while RIL stock has underperformed. However, RIL shares have performed well after the announcement of the imminent commercial launch of services by its telecom unit at its annual general meeting in early September. Singapore GRMs also strengthened in September, which helped sentiment. Citi Research forecast RIL’s FY16-19 consolidated earnings before interest, tax, depreciation and amortization, or Ebitda (including Jio), growing at a 15% compounded annual growth rate versus -1% over FY11-15.

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