Oil companies are likely to report a decent set of numbers for the December quarter. Singapore gross refining margin (GRM), though lower on a year-on-year basis, has improved sequentially (see chart). Nevertheless, a better refining environment is expected to reflect in the December quarter numbers of Indian refining companies. GRM is a measure of the difference between the per barrel price of crude oil and the value of products distilled from it.
State-run oil marketing companies (OMCs)—Bharat Petroleum Corp. Ltd, Hindustan Petroleum Corp. Ltd and Indian Oil Corp. Ltd—are expected to report a good quarter thanks to a recovery in GRMs and inventory gains.
“While we assume inventory gains (GRM $1-2 a barrel, marketing segment $1-1.5 a barrel), we think OMCs could surprise,” pointed out Nomura Financial Advisory and Securities (India) Pvt. Ltd. OMC stocks have outperformed the BSE Sensex so far this fiscal year. Currently, they trade in the range of about 9-12 times estimated earnings for FY17.
For Reliance Industries Ltd (RIL), improvement in refining margins is expected to be set off to an extent against muted performance from its petrochemicals business. Analysts from Jefferies India Pvt. Ltd expect RIL’s earnings to be largely flat versus the September quarter. That is because, according to Jefferies, the company’s GRM is likely to improve by a more modest $0.7 a barrel to $10.8 a barrel in the December quarter due to a five-week maintenance shutdown at one of its FCC (fluid catalytic cracking) units and sharper improvement in gasoline and fuel oil cracks relative to middle distillate cracks. Middle distillate products account for a relatively higher share of RIL’s product slate.
Secondly, the company’s blended petrochemical margin has been slightly lower last quarter. Further, the impact of currency demonetization needs to be watched on the petrochemicals segment. Management commentary on the telecom business and updates on downstream projects will be crucial for the RIL stock, which has underperformed the benchmark Sensex so far this fiscal year.
Meanwhile, earnings of upstream oil companies—Oil and Natural Gas Corp. Ltd and Oil India Ltd—are expected to benefit from the strength in crude oil prices. On the flip side, some of those gains are likely to be offset by the 18% cut in domestic gas price. Shares of both companies have fared well this year but the outlook seems tough. In a report on 7 January, analysts from Religare Institutional Research said oil prices need to average well above $60 a barrel for any significant upside in earnings and valuations of these companies.