Mixed outlook for oil firms in Q4

Even as RIL’s numbers may bring good tidings, expectations from oil marketing companies like BPCL, HPCL and Indian Oil are not rosy

Graphic: Subrata Jana/Mint
Graphic: Subrata Jana/Mint

The Reliance Industries Ltd (RIL) stock has gained 27% since its December quarter results. However, the appreciation is attributable less to its performance and more to anticipation that Reliance Jio Infocomm Ltd (the company’s telecom business) may perform better than expected.

When RIL announces its March quarter results too, investors will be keenly watching out for updates on Jio, apart from the company’s downstream projects and its capex plans. Its March quarter results are expected to be good despite the fact that the benchmark Singapore gross refining margin (GRM) has declined about 5% sequentially to $6.4 a barrel. Analysts expect RIL to report better GRMs during the March quarter.

According to analysts at Nomura Research, RIL’s premium to Singapore GRM will likely improve (the December quarter had a shutdown of the fluidized catalytic cracking unit; also Brent-Dubai crude spreads were favourable). “Petchem (petrochemical) earnings will likely increase further both as Reliance benefits from higher volumes (new capacities) and firmed up margins particularly in aromatics chain,” pointed out Nomura’s March quarter preview for the oil and gas sector.

GRM is the realization from turning every barrel of crude oil into finished products and is an important measure of profitability for refining firms.

Even as RIL’s numbers may bring good tidings, expectations from oil marketing companies (OMCs)—Bharat Petroleum Corp. Ltd (BPCL), Hindustan Petroleum Corp. Ltd (HPCL) and Indian Oil Corp. Ltd—are not rosy. Analysts from Jefferies India Pvt. Ltd expect weaker earnings for OMCs due to inventory losses in both refining and marketing, and lower core GRMs year-on-year. With oil prices declining towards the end of the March quarter, OMCs are expected to report inventory losses. However, “full year consolidated earnings should surprise positively, particularly for HPCL and BPCL, due to strong performance in subsidiaries in FY17 vs FY16”, said Jefferies in a report to clients on 6 April.

On an average, crude oil prices rose year-on-year and that will reflect positively in price realizations of upstream companies such as Oil and Natural Gas Corp. Ltd and Oil India Ltd. Investors will have to keep a tab on output numbers and production outlook in the near future. So far, both these stocks have underperformed compared to their peers in the oil sector. Given the muted outlook on crude oil prices over the medium term, there is little to suggest the trend in their stock performance will change for the better.

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