Will oil companies’ September quarter numbers fuel investor confidence?

Shares of Reliance Industries Ltd (RIL) have gained nearly 20% since its annual general meeting on 12 August, when chairman and managing director Mukesh Ambani said the company will have zero net debt by 31 March 2021.

In that backdrop, when RIL announces its September quarter results on Friday, “any signs of decline in capex intensity should increase confidence in our view”, said analysts from HSBC Securities and Capital Markets (India) Pvt. Ltd.

That apart, the sequential recovery in refining margins should help RIL’s earnings. For perspective, benchmark Singapore gross refining margins have averaged $6.5 a barrel for the September quarter, up from $3.5 a barrel in the June quarter.

“A sharp recovery in refining margins, coupled with lower ethane and LNG prices, and higher petchem volumes, should partly offset weakness in benchmark chemical margins and deliver 7% qoq growth in standalone earnings,” HSBC analysts said in a report on 8 October.

Separately, state-run oil marketing companies (OMCs) are expected to report a good set of numbers for the September quarter. OMCs include Bharat Petroleum Corp. Ltd (BPCL), Hindustan Petroleum Corp. Ltd (HPCL) and Indian Oil Corp. Ltd (IOC). Performance of these companies will get a boost from the rebound in refining margins. Further, auto fuel marketing margins have remained resilient. These two factors are likely to set off inventory and forex losses to some extent.

Analysts from Kotak Institutional Equities expect BPCL and HPCL to report 20-23% quarter-on-quarter (q-o-q) increase in Ebitda (earnings before interest, tax, depreciation and amortization), despite accounting for ₹1,000-1,100 crore of inventory and forex losses. The broker expects IOC to report 20% q-o-q decline in Ebitda, impacted by the ₹3,300 crore in inventory and forex losses. IOC’s profitability is expected to be relatively weaker than its peers, HPCL and BPCL, primarily owing to higher inventory losses.

Meanwhile, crude oil prices have dropped by about 18% in the September quarter from a year ago. This is likely to drag down profits of oil producers such as Oil and Natural Gas Corp. Ltd and Oil India Ltd, as price realization gets adversely affected.

In keeping with the optimism in the broader markets and talks of BPCL’s privatization, shares of all these companies have run up after the corporate tax rate cuts. As such, September quarter results are not expected to fuel big jumps in share prices.

“The stock prices, in our view, are unlikely to move on earnings but would be news flow dependent,” wrote analysts from JP Morgan India Pvt. Ltd in a report on 7 October.

“For the broader state-owned enterprises space, how the government moves on the potential BPCL privatization would be an important driver for stocks. For Reliance, the key events that investors are focused on are the completion of various deleveraging deals,” added the analysts.