Home / Industry / Energy /  Reliance key beneficiary as refining margins skyrocket
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NEW DELHI : Asian refining margins have shot up as crude oil trades at elevated levels, resulting in windfall gains for oil refiners. While Indian refiners across the board have gained, a key beneficiary is top energy firm Reliance Industries Ltd, winning multiple earnings upgrades, and its stock racing ahead of benchmark indices.

According to Moody’s Investor Services, the Singapore-Dubai hydrocracking margin averaged at a multi-year high of $39 per barrel in the week ending 24 June, close to 20 times the $2 average in 2021. Refining margins are at super-cycle levels because of a shortage of transportation fuels as demand outpaces supply in Asia, Moody’s said.

The rebound in demand for auto fuels following the easing of covid-led restrictions has boosted gross refining margins (GRMs). Supplies squeezed by the sanctions against Russia, following significant refinery closures during the pandemic, lifted them further. The mismatch in demand and supply has driven a surge in the margins of gasoline, gasoil and jet fuels, added Moody’s.

Total operable refining capacity in the US declined by 509,000 bopd (barrels of oil per day) in 2021, following a decline of 422,000 bopd in 2020, Haitong Securities said. Lower margins during the pandemic and higher costs led to a sharp fall in capacity, erasing capacity additions of the last five years, said analysts. Also due to a production quota, Chinese refining throughput remains under pressure.

The surge in GRMs has improved the prospects of Indian refiners. Oil refining major Reliance Industries Ltd has received upgrades by multiple foreign brokerages, with its stock outperforming the broader indices.

Other beneficiaries of higher margins include oil marketing companies (OMCs) Bharat Petroleum Corp. Ltd (BPCL), Hindustan Petroleum Corp. Ltd (HPCL), and Indian Oil Corp. Ltd (IOCL). Though OMCs continue to see headwinds led by high crude prices and pressure on marketing margins, however, they are still getting some cushion to their earnings from firm refining margins.

“Multi-year-low inventories, declining Russian exports, muted Chinese exports, lower diesel production in Europe and delays in commissioning of ME refineries are, in our view, tailwinds to refining margins in CY22," Jefferies India Ltd said in a report. Initial estimates suggest RIL could deliver 60% sequential growth in O2C (oil to chemical) Ebitda in 1QFY23 with the likelihood of earnings upgrades, added Jefferies.

Other brokerages too say RIL is set to benefit immensely from strong refining margins and gas prices.

“Our EBITDA/EPS estimates are 8%/4% above the consensus estimates for FY23/FY24 and can potentially see a further upward revision based on global refining margins in H2FY23" said analysts at Haitong Securities. They expect the European Union’s complete phase-out of Russian petroleum products over the next 6-8 months, US refinery shutdowns and higher usage of fossil fuels to counter cost inflation to continue supporting the GRMs. Though analysts expect a fall in product cracks over the period from current levels, they expect it to remain significantly higher than the last five-year average.

JP Morgan Asia Pacific Equity Research too has upgraded the ratings of Reliance Industries Ltd. In their view, RIL is among the few large companies in India with a positive earnings revision cycle ahead, given the strong refining and gas environment. “Our upgrade to Over Weight is driven by a global view of strong refining environment though we build in a decline in product cracks from current levels; and, RIL’s non-energy business valuations continuing to hold up," said analysts at JP Morgan.

Meanwhile, the financial performance of India’s state-owned refining and marketing companies—BPCL, HPCL and IOCL—though getting support from firm refining margins, is expected to remain weak so long as their net realized prices for gasoline and gasoil are lower than international market prices, said analysts.

Nonetheless, Moody’s investor services added that it does not expect this situation to be sustained. They expect the Indian government to eventually allow fuel retailers to adjust selling prices, but the price increases will be implemented gradually.

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