Oil: GRMs decline sequentially for refining companies
Gross refining margins weakened on account of weaker petrol and LPG crack spreads and refining inventory losses versus substantial inventory gains in the June quarter
The June quarter was a good one for refining companies. Gross refining margins (GRMs)—the difference between the per-barrel price of crude and the value of products distilled from it—had fared better then.
But there was no such luck in the September quarter. State-run oil marketing companies (OMCs) Bharat Petroleum Corp. Ltd (BPCL), Hindustan Petroleum Corp. Ltd (HPCL) and Indian Oil Corp. Ltd (IOC) saw a sequential dip in GRM in the past quarter.
GRMs for IOC, BPCL and HPCL in the September quarter weakened to $4.3 per barrel (June quarter: $10 a barrel), $3.1/bbl (1Q: $6.1/bbl) and $3.23/bbl (1Q: $6.83/bbl), respectively.
According to Antique Stock Broking Ltd, that was on account of weaker petrol and liquefied petroleum gas (LPG) crack spreads and refining inventory losses versus substantial inventory gains in the June quarter.
GRM is a key measure of profitability for refining companies.
Reliance Industries Ltd’s (RIL) GRM declined to $10.1 a barrel in the September quarter, compared with $11.5 a barrel in June quarter. Even so, its GRM was slightly better than some brokerage firms’ estimates.
Petrochemicals business performed well but the oil and gas business was a laggard. Overall, RIL’s results were pretty much in line with estimates.
Consider this: stand-alone earnings before interest, taxes, depreciation and amortization (Ebitda) in the September quarter came in at Rs10,555 crore. A poll of Bloomberg analysts had estimated RIL’s Ebitda at Rs10,569 crore.
Meanwhile, state-run upstream oil firm, Oil and Natural Gas Corp. Ltd (ONGC) delivered a decent quarter. Despite a fall in revenue, ONGC was able to eke out a 4% year-on-year growth in pre-tax earnings.
Oil India Ltd’s pre-tax earnings, however, declined 16% year-on-year. Stocks of these firms have performed well this fiscal. Increase in crude prices would augur well for these stocks and investors should keep a tab on that.
OMC stocks have outperformed the benchmark Sensex since the beginning of this fiscal till 2 December while RIL shares have underperformed.
From here on, GRM has to improve for further upside in stock prices of OMCs, said Emkay Global Financial Services Ltd in a report on 16 November.
“Though structurally, we remain positive on OMCs, the sharp rally in recent months has resulted in stock prices reaching our target prices, thus leaving no upside potential from the current levels,” added the brokerage.
The RIL stock is likely to take cues from news flow of its telecom business, apart from movement in GRM.