For oil marketers, will inventory gains offset lower margins?
With the Singapore gross refining margins (GRMs) declining in the December quarter compared to the previous one, will that affect the financial results of Indian oil marketers?
GRM is a key measure of profitability for refining firms and is derived by deducting the cost of crude oil it consumes from the total market value of the refined products it produces.
It’s not just low GRMs that are a problem. Marketing margins for state-run oil marketing companies (OMCs)—Bharat Petroleum Corp. Ltd, Hindustan Petroleum Corp. Ltd and Indian Oil Corp. Ltd—have declined considerably compared to the September quarter.
Still, the results of OMCs for the quarter ended December have some comforting elements that would support numbers. Kotak Institutional Equities expects downstream public sector units to report robust profits in the third quarter of fiscal year 2018, as sharply higher inventory gains due to a sustained increase in global crude oil prices through the quarter will adequately offset 1) lower underlying refining margins—Singapore complex margins declined $1 a barrel quarter-on-quarter (q-o-q) to $7.3 a barrel, and 2) steep reduction in marketing margins on auto fuels by Rs0.8-1.2 per litre, largely attributed to the lack of increase in retail fuel prices during the state elections.
The results of upstream companies—Oil and Natural Gas Corp. Ltd (ONGC) and Oil India Ltd (OIL)—are expected to benefit from the anticipated increase in price realizations for both oil and gas. At ONGC, gas output rose ~1% q-o-q although oil has slipped ~2% q-o-q but stronger oil/gas realizations may still leave stand-alone Ebitda (earnings before interest, tax, depreciation and amortization )19% higher q-o-q, with net profits up a lower 2% q-o-q due to lower other income, pointed out analysts at Jefferies India Pvt. Ltd, in a report on 10 January. OIL’s net profit may also decline sequentially on account of muted other income.
For Reliance Industries Ltd (RIL), even though the refining margin environment was lacklustre during the quarter and may affect its refining business, the performance of its petrochemicals segment is expected to offer some comfort to the stand-alone numbers considering that petrochemicals volumes are expected to increase due to the refinery off-gas cracker ramp up.
But consolidated earnings are likely to be better. Jefferies expects consolidated earnings to rise a quicker 8% q-o-q (and 17% year-on-year) to Rs8,760 crore as retail revenue growth continues and telecom turns profitable. Of course, it goes without saying that investors must keep a close eye on the telecom business considering the segment has been a chief reason for the RIL stock’s outperformance.
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