The operating environment for refining companies was strong in the quarter ended June. Naturally, investors were looking forward to at least some of that benefit to reflect in the financial results of refining companies. But Essar Oil Ltd, the first of the refiners to announce results this season, has disappointed.
Its gross refining margins (GRMs) for the June quarter stood at $7.38 (around Rs 328 today) per barrel compared with $8.15 per barrel in the March quarter. Refining margin is the difference between the total value of petroleum products produced by an oil refinery and the price of crude oil.
Singapore GRMs, on the contrary, have averaged at more than $8 per barrel in the June quarter compared with $7.4 per barrel in the March quarter. That improvement can be primarily attributed to continued shutdown of the Japanese refining capacity and better spreads in petroleum products. Moreover, Essar Oil’s reported GRM is inclusive of sales tax benefit of around $3 per barrel against $2.8 per barrel in the March quarter.
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At the net level, Essar Oil does show a strong 46% jump sequentially in the reported net profit to Rs 470 crore. However, that’s mainly because the company’s tax expense also includes MAT (minimum alternate tax) credit entitlement. Profit before tax has grown by 6%.
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While the numbers seem a tad disappointing, what’s probably good news is that the expansion plan appears to be on track, with the company planning to take a 35-day planned shutdown starting 18 September for the tie-ins of new units.
Essar Oil is in the process of expanding its refining capacity, the first phase of which will increase the capacity to 18 million tonnes per annum (mtpa) from 14 mpta currently. Also, the completion of the first phase of the expansion is expected to improve the refinery complexity to 11.8 from 6.1, which should help increase the proportion of heavy and ultra-heavy crude that it processes.
After the expansion, Essar Oil’s refining margins are expected to improve. This should lead to substantial increase in the company’s earnings per share and cash flow run rates, say analysts.
Needless to say, any delay in the refinery expansion would be negative for the stock’s prospects. The Essar Oil stock has risen by 2% since the beginning of this fiscal compared with about a 4% decline in the benchmark Sensex of the Bombay Stock Exchange during the same period.
Graphic by Naveen Kumar Saini/Mint