Oil sector stares at Rs 16,000-cr inventory hit in Q3: Crisil

The oil sector players are staring at Rs 16,000 crore in inventory loses in the third quarter despite a steep fall in under-recoveries following fall in crude prices during September-December, says a report.
Crisil expects aggregate inventory losses of players in the oil chain to be around Rs 16,000 crore in the third quarter of the current fiscal, of which a substantial share will be borne by refiners, the agency said in a report today.
"Crude oil prices fell by a third, and closed out 2014 at USD 55 per barrel in the September-December period. In tango, prices of petroleum derivatives like polymers and chemicals also declined by around 30 per cent.

"This will mean inventory losses of around Rs 16,000 crore for refiners, traders and manufacturers of downstream petroleum products because their raw material purchases would have been at higher prices," Crisil said.
The calculation is based on an analysis of about 250 Crisil-rated companies, including refiners, traders, polymer processors, and bulk and specialty chemical manufacturers. These firms have average total inventory of about 45 days, it typically ranges 30-60 days, depending on the location of plant, processing time, and price outlook, Crisil said.
For oil marketing companies, the losses are partly offset by higher profit margins from retail sales of petrol and diesel after deregulation of prices.

On a positive side, this will mean steeply lower working capital needs for oil marketers leading to fewer short-term borrowings and ultimately lower interest cost.

Crisil chief analytical officer Pawan Agrawal said, "Support from the government given it's strategic importance, higher profit margins on marketing of oil products, lower dependence on subsidy payments, and lesser working capital loans will sustain the credit profiles of oil refiners."
On the other hand, impact of inventory losses on chemical traders and downstream processors of crude, polymers and chemicals will depend on their product profiles, hedging policies, inventory build-up, and balance-sheets, he noted.
On a positive side, he says these firms have already begun to cut inventories to minimise pain.

"We expect the impact to be higher on credit profiles of companies that have weak debt protection metrics, elevated gearing levels, and higher inventory holding," said Agrawal. Over the medium to long-term, these firms will benefit from lower working capital borrowings and reduced interest costs as input cost fall.