Oil: Producers lose, refiners gain in March quarter

While oil prices have shown some strength, the outlook from a medium-term perspective stays subdued


The refining margins are lower so far quarter-to-date compared with the March quarter, which isn’t good news for refiners.
The refining margins are lower so far quarter-to-date compared with the March quarter, which isn’t good news for refiners.

Refining margins declined for the March quarter, compared with the December quarter, albeit slightly. That trend shows in gross refining margins (GRM) of Indian refiners (see chart).

Reliance Industries Ltd’s (RIL’s) GRM last quarter was $10.8 per barrel, compared with $11.5 a barrel in the December quarter. Still, the measure was a bit higher than many analysts’ estimates. For instance, BNP Paribas Securities (Asia) Ltd and Morgan Stanley Research and were expecting a GRM of $10.5 per barrel and $10.6 a barrel, respectively.

Overall, RIL results were marginally better than expected. Its standalone Ebitda (earnings before interest, taxes, depreciation and amortization) for the March quarter was about 3% higher than consensus estimates. Strong petrochemicals’ business profitability owing to strong product deltas (rate of change in prices, compared with the change in unit costs) and low absolute product prices, also helped overall performance.

State-run oil refining and marketing companies—Bharat Petroleum Corp. Ltd (BPCL) and Hindustan Petroleum Corp. Ltd (HPCL)—too, reported decent GRMs, as the chart shows. But Indian Oil Corp. Ltd’s (IOC) GRM were comparatively much lower, owing to substantial inventory losses. These companies also fared well on the marketing margin front. According to Spark Capital, the marketing margins on a blended basis increased by more than 20% quarter-on-quarter for all three companies because of lower price pass through in auto fuels. “Marketing margins on non-auto fuel products also rose by >10-15%,” added Spark Capital in a report on 31 May.

On the other hand, the lower oil prices have understandably taken a toll on shares of Cairn India Ltd, Oil and Natural Gas Corp. Ltd (ONGC) and Oil India Ltd, all of which have underperformed the benchmark Sensex in the past year.

For the March quarter, in keeping with low prices, the realizations of these producers have dropped considerably.

Cairn’s crude oil net realization for March quarter was $27.8 per barrel. ONGC and Oil India’s net realizations came in at $34.88 a barrel and $32.62 a barrel, respectively.

While oil prices have shown some strength lately, the outlook from a medium-term perspective continues to be subdued. That will cloud sentiments for stocks of oil-producing companies.

The refining environment, too, has been lacklustre. The refining margins are lower so far quarter-to-date compared with the March quarter, which isn’t good news for refiners.

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