BackOil firms: What will the March quarter offer?
In keeping with subdued oil prices, earnings of upstream oil companiesONGC, Oil India and Cairn Indiaare expected to disappoint
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It is true that gross refining margins (GRMs) declined in the March quarter on a sequential basis. But the good news is that the decline is marginal. Analysts at Jefferies India Pvt. Ltd estimate Singapore complex GRM for the last quarter at $7.8 a barrel versus $8 a barrel in the December quarter. Considering the paltry decline, one can expect refining firms to continue to report strong numbers.
The brokerage firm expects another good quarter from Reliance Industries Ltd (RIL) led by refining, with GRM expected to be $10.5 a barrel, it said in a note. While this is somewhat lower than the peak of $11.5 a barrel hit in the December quarter, it is still much higher than the average of the past five years at $8.6 per barrel reported by the company, added Jefferies. Expectations run low from RIL’s exploration and production business while the petrochemicals business may show stable performance, as margins have remained steady. For the stock that trades at about 11 times estimated earnings for this fiscal year, management commentary on the telecom business and downstream expansion projects will be crucial.
On the other hand, year-on-year (y-o-y) numbers of state-run oil marketing companies (OMCs) will reflect the impact of a high base last year. But sequentially, performance is expected to be better. According to IDFC Securities Ltd, a combination of: i) strong refining throughput; ii) higher GRMs from discounts on Middle East crude blends; iii) record product demand in India (FY16E growth ~9.8%, 2x that in FY15); and iv) sharp increase (rise) in average marketing margins quarter-on-quarter (q-o-q), helped by sharply higher diesel and petrol margins, should drive a strong 68% q-o-q earnings growth for OMCs.
In keeping with subdued oil prices, earnings of upstream oil companies—Oil and Natural Gas Corp. Ltd (ONGC), Oil India Ltd and Cairn India Ltd—are expected to disappoint. Investors would do well to track production numbers as well. Cairn India announced on Monday that its average daily gross working interest (share in various fields) production declined 5% y-o-y for the March quarter. ONGC’s consolidated earnings are expected to be further adversely hit on account of impairment losses at overseas subsidiary ONGC Videsh Ltd.
Of course, upstream stocks reflect the impact of falling oil prices. Improvement in oil price is necessary for turning the fortunes of these companies around. In the near term, the forthcoming meeting between the Organization of the Petroleum Exporting Countries (OPEC) and non-OPEC producers should offer some cues on the direction of oil prices.
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