Oil sector staring at Rs 16,000 crore inventory losses: Crisil

Says a substantial share of the losses will be borne by refiners

A sinking crude oil price has resulted in aggregate inventory losses of Rs 16,000 crore in the third quarter of the current financial year for oil companies. A substantial share of this will be borne by refiners, said CRISIL Ratings on Monday.

Brent crude has fallen about 50 per cent from its June 19 high of $115.71 a barrel. Between September and December, it fell by a third and closed 2014 at $55 a barrel. Prices of petroleum derivatives such as polymers and chemicals declined around 30 per cent.

“This will mean inventory losses for refiners, traders and manufacturers of downstream petroleum products, as their raw material purchases would have been at higher prices,” said CRISIL.

The calculations are based on an analysis of about 250 companies rated by it. These cover refiners, traders, polymer processors, and bulk and speciality chemical manufacturers. These companies have an average total inventory holding of about 45 days. It typically ranges between 30 and 60 days, depending on the location of plant, processing time and price outlook.

For oil marketing companies, the losses are partly offset by higher profit margins from retail sales of petrol and diesel after deregulation of prices. Current prices reduce both dependence on subsidy from the government and inventory costs for these companies. This, in turn, will mean substantially lower working capital requirements, leading to less of short-term borrowing and, ultimately, lower interest cost.

“Support from the Government of India, given its strategic importance, higher profit margins on marketing of petroleum products, lower dependence on subsidy payments, and lesser working capital loans will sustain the credit profiles of oil refiners,” said Pawan Agrawal, chief analytical officer, CRISIL.

The impact of inventory losses on chemical traders and downstream processors of crude oil, polymers and chemicals will depend on their product profiles, hedging policies, extent of inventory build-up, and strength of balance sheets. These companies have begun to actively reduce inventories to minimise the pain of the sharp fall in crude oil. This should help them ease potential pressure on credit profiles.

“We expect the impact to be higher on credit profiles of companies with weak debt protection metrics, elevated gearing levels and higher inventory holding,” said Agrawal.

In the medium to long term, these companies will benefit from lower working capital borrowing and reduced interest costs from lower prices of inputs.

SLIDING INVENTORY

• A substantial share of the hit will be borne by refiners,according to CRISIL
   
• Brent crude has fallen about 50 per cent from its June 19 high of $115.71 a barrel
   
• The calculations are based on an analysis of about 250 companies rated by it
   
• These companies have an average total inventory holding of about 45 days
   
• For oil marketing companies, the losses are partly offset by higher profit margins from retail sales of petrol and diesel after deregulation of prices