Oil marketing firms: Gross refining margin, demand remain under pressure

Q4 numbers were boosted by inventory gains

The Q4 results of HPCL, IOC, and Reliance Industries (RIL) give us an idea of where the energy markets are headed. All three registered large inventory gains; all three saw a decline in finance costs; all three firms experienced margin pressure and low demand. And the conversion of oxygen capacity for medical use will impact production in Q1FY22.

India has heavy dependence on imports for over 80 per cent of crude consumption and 30 per cent of gas consumption. Globally, crude prices had risen over 20 per cent in Q4FY21. While current prices are in the range of $64 per barrel for the Indian crude basket, projections suggest global crude will rise to $80 or more, given a recovery in economic growth. This is despite a downgrade of India’s GDP (India is one of the largest importers).

Gross refining margin (GRM) is the value addition of products per barrel of crude. Since mid-2020, benchmark Singapore GRM is negative. In Q4, GRM was $1.87 per barrel, well below the long-term average of $6.25. Indian GRM is positive but likely to compress and may be close to Singapore GRM, excluding inventory gains.

HPCL’s Q4FY21 PAT was up to Rs 3,018 crore, a huge jump from Rs 27 crore a year ago. Sales rose 19 per cent YoY to Rs 84,905 crore. There was an inventory gain of Rs 4,051 crore compared to a loss of Rs 2,885 crore in the corresponding period a year ago, due to a 23 per cent rise in oil prices during Q4. HPCL expects May to see a drop of 30 per cent in fuel demand.

Indian Oil Corp (IOC) reported PAT at Rs 8,781 crore for Q4FY21, against a loss of Rs 5,185 crore a year ago. Sales rose 18 per cent. Profit in petrochemicals rose 470 per cent YoY and accounted for 19 per cent of Q4 profit. The rise in crude prices contributed Rs 8,400 crore to inventory gains. Without inventory gains, PAT would have been lower by 80 per cent. Despite the low base of Q1FY21, the company estimates sales volumes will fall 20 per cent YoY in April-May 2021.

RIL’s oil-to-chemicals division registered 4.4 per cent growth in revenues YoY to Rs 1.01 trillion, from Rs 96,732 crore. Total FY throughput was 18.7 million metric tonne (mmt), a YoY reduction from 20.1 mmt, mainly due to lockdowns. There were inventory gains. Revenues from the oil & gas (exploration & production) segment were Rs 848 crore in Q4, against Rs 625 crore YoY.

The marketing margin fell QoQ for the public sector OMCs -- they could not pass on the full extent of crude/gas/naphtha price increases due to the Assembly elections. The margin on petrol may be in negative territory. This will hurt the BPCL privatisation plans, though the Street is optimistic about a large dividend.

 If prices rise further, there may be more inventory gains. But GRM would fall and the marketing margin across fuels can go red. Low demand in Q1 is also an issue. While IOC, BPCL, and HPCL are all trading at or close to 52-week highs, RIL has seen more correction. In the past year, all four stocks have underperformed the Nifty.