Refining margins have been strong in the March quarter mainly on account of better product cracks and refinery shutdown in Japan due to the earthquake. Singapore gross refining margins (GRMs) have averaged about $7 per barrel for the quarter. Refining margin is the difference between the total value of petroleum products produced by an oil refinery and the price of crude oil.
For the March quarter, improved refining margins are expected to reflect positively in the financials of Indian oil refining companies such as Chennai Petroleum Corp. Ltd, Mangalore Refinery and Petrochemicals Ltd, Essar Oil Ltd and Reliance Industries Ltd (RIL).
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However, analysts maintain that RIL’s premium over Singapore GRM is likely to be lower on account of a five-week shutdown taken for the fluidized catalytic cracking unit. Motilal Oswal Securities Ltd estimates RIL’s premium over Singapore GRM in the March quarter to be $2.9 per barrel compared with $3.5 in the December quarter.
For RIL, the underperformance in its exploration and production business is expected to be offset to some extent by better performance of the company’s refining and petrochemicals business.
Meanwhile, higher crude oil prices during the quarter are likely to benefit the financials of Cairn India Ltd, as it is the only play on crude oil in the country. Unfortunately for investors, in the recent past, the stock has been surrounded by the overhang of the Vedanta Resources Plc deal, which capped upsides.
Oil and Natural Gas Corp. Ltd (ONGC) and Oil India Ltd, too, would have benefited from rising oil prices if they were not sharing the subsidy of the oil marketing companies (OMCs). Analysts expect both the companies to perform well driven by better net crude price realization and higher APM (administered price mechanism) gas prices.
Kotak Institutional Equities has assumed subsidy loss of Rs 7,000 crore and Rs 940 crore for ONGC and Oil India, respectively, in its March quarter results preview. On a sequential basis, ONGC’s reported net profit should show a considerable decline, as the company had one-time income in the December quarter from the gas pool account for contribution made earlier.
As far as OMCs—Bharat Petroleum Corp. Ltd, Hindustan Petroleum Corp. Ltd and Indian Oil Corp. Ltd—are concerned, perhaps the less said the better. Profitability of these companies would depend mainly on how the subsidy is shared and contribution from the government and upstream companies.
Graphic by Yogesh Kumar/Mint
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