Q3 earnings preview: Upstream oil firms could report better numbers

Oil marketing companies might feel the pinch of inventory losses

Despite falling crude oil prices, upstream oil companies are likely to report strong financial numbers for the October-December quarter, thanks to better crude oil realisations of around $55 a barrel, against $44-48 in the first six months of this financial year.

This, analysts say, is due to a 37 per cent decline in underrecoveries — oil companies’ losses on account of selling petroleum products below market price — to Rs 13,900 crore in the December quarter, and the full impact of a deregulation in diesel prices effected from October 18. “Also, lower gross crude oil prices made it imperative for the government to reduce the per-barrel subsidy burden to $23 from $56 in the first half of current year,” equity research firm Religare said in a report.

The petroleum ministry is currently considering completely waiving the subsidy burden on upstream firms. Experts say gross realisation of upstream firms stood at around $65 a barrel in the December quarter. “So, if there is no subsidy burden on them, there will be no debit. Therefore, net realisation will be much higher than the realisation in comparable quarter of last year, and the first two quarters of this year,” said former Oil India director (finance), Ananth Kumar. He added even if the firms had to share a subsidy burden of around $23 a barrel, as analysts expect, the net realisations would end up flat.

For downstream refiners, though product spreads and refining margins improved in the December quarter, earnings for state-run oil marketing companies, as well as private-sector firm Reliance Industries Ltd (RIL), would still be hit by high inventory losses, on account of a decline of roughly 40 per cent in crude oil prices. RIL is likely to announce its December quarter results on January 16.

“We expect RIL to report gross refining margins (GRMs) of $7.7 a barrel, compared with $8.3 a barrel in the previous quarter. Along similar lines, while petrochemical margins have improved during the past few quarters, sales have been sluggish on lower buying interest due to price volatility,” Religare said.

Thanks to a sharp correction in global crude oil prices, underrecoveries of state-run oil marketing companies — Indian Oil Corporation, Bharat Petroleum Corporation and Hindustan Petroleum Corporation — declined to Rs 15,200 crore during the December quarter, according to research firm Emkay Global Financial Services. It said while state-run upstream companies were expected to post improvement in net realisations — ONGC’s $48 a barrel (from $41.4 a barrel in second quarter) and OIL’s $52 a barrel ($45 a barrel in the previous quarter) — oil marketing companies’ gross refining margins could turn negative because of inventory losses. These firms maintain a crude oil inventory of 90 days.

“We expect negative GRM for oil marketing companies, of $0.5-(2) a barrel, due to inventory losses of Rs 8,000-10,000 crore... We assume a cash discount of Rs 7,400 crore from upstream companies and Rs 7,400 crore as cash compensation from the government,” said Dhananjay Sinha in the Emkay Research report.

Benchmark Singapore GRMs, however, improved by $1.5 a barrel on a sequential basis to $6.3 a barrel in the December quarter. “For RIL, analysts expect lower GRMs... While we expect petchem margins to improve for PP, PE and PVC, its benefit might be limited due to weak demand. Net profit for the December quarter is expected to contract 9.6 per cent sequentially to Rs 51,900 crore,” said Sinha.