Wednesday, January 16, 2008

Sizzling crude prices to hurt oil retailers most

WHEN Indian oil companies post their Q3 numbers later this month, the biggest gainers would be those which are not involved in retail marketing of their products in India. These include public sector companies like Mangalore Refinery (MRPL), Chennai Petroleum (CPCL) and Bongaigaon Refinery (BRPL) as well as private sector ones like Reliance Industries (RIL) and Essar Oil. Exploration and production companies, too, will benefit from the higher crude oil prices, which a v e r a g e d above $90 per barrel during the quarter. The public sector marketing companies will end up as losers if oil bonds do not arrive in time to compensate their loss.

The growth in gross refining margins (GRMs) — the margin available to a refinery for processing a barrel of crude oil — was higher during the past quarter, which was driven by sharp rise in product prices. The prices of petro products such as petrol, diesel and naphtha have risen faster than crude oil. The benchmark Singapore refining margins have almost doubled in the quarter to around $8 compared to December 2006 quarter. This means a bonanza for domestic standalone r e f i n e r s such as RIL, M R P L , CPCL and BRPL as they get international prices for their final product. A part of their gains could be eroded by appreciation in rupee. In the private sector, refiners such as RIL and Essar Oil are likely to report strong bottomline growth during the December 2007 quarter, against the same quarter last year. Higher GRMs are likely to compen-sate the negative effect of around 5% fall in RIL’s refinery throughput. After spending several quarters making losses, Essar Oil could finally start reporting net profits on a consistent basis from December quarter onwards. Essar commissioned its refinery in December 2006 and is still operating below its rated capacity of 10.5 million tonne pa.

With the spurt in crude oil prices, the global crude oil producers are witnessing substantial growth in their profits. However, this doesn’t hold true for ONGC. The company is mandated by the government to share a part of under-recoveries suffered by downstream oil marketing companies by selling the crude oil at a discount. ONGC’s discounts are expected to cross $25 per barrel, while the appreciated rupee, too, will reduce company’s realisations. Despite these odds, ONGC is likely to put up a marginal growth in its profits when it publishes its results next week. Other crude oil producing companies such as Cairn India, Hindustan Oil Exploration (HOEC) and Selan Exploration, among others, will also benefit from the rising crude. Of these, HOEC is likely to report a fall in the production volume during the quarter. The spotlight is, however, likely to be on oil marketing companies (OMCs) Indian Oil, BPCL and HPCL, which will depend on issue of oil bonds for maintain-ing profits. The losses in their retail operations will be higher com-pared to the gains in their refining business. The group of ministers meeting on January 17 is likely to suggest measures to ease the pressure. Out of these, BPCL is likely to post around 10% growth in its refinery production, which will help its performance.




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