Monday, January 12, 2009

Fall in crude, refinery margins may dent oil cos’ bottomline

INDIA’S petroleum majors are likely to post a fall in profits as well as revenues when they announce their results for the quarter-ended December 31, 2008, later in the month. The crash in crude oil and polymer prices, coupled with a decline in refining margins, is likely to result in heavy inventory losses. On the other hand, the current scenario could also serve as a springboard for some of them — particularly companies with oil marketing and gas transmission operations — to report a better performance in the year-ending quarter.
Oil prices fell by over 55% during the December quarter, much steeper than the 30% fall in the September 2008 quarter. Thus, going by the September quarter’s performance of domestic petroleum firms — PSU oil refiners posted unprecedented losses — the December quarter could be worse. The weak rupee will also have a negative impact for refiners, but bring a relief for oil producers.

Petroleum producers
Due to standstill production and lower realisations, ONGC's profitability is likely to stagnate in the quarter. Merrill Lynch, which expects flat earnings from the company, says in its Q3 preview report, “The weaker rupee and a fall in subsidy are likely to make up for the decline in ONGC’s oil and product price realisation.” Brokerage Prabhudas Leeladhar estimates ONGC’s profits to slip by 2.5% to Rs 4,257 crore. According to ETIG estimates, ONGC may post a 30% drop in net profit to Rs 3,026 crore with net realisation in the quarter at $45 a barrel. Although its net sales are expected to be lower on a year-on-year basis, the net profit of Cairn India is likely to receive a boost from higher income courtesy other investments.

Refiners
Benchmark Singapore refining margins fell 66% to an average of $1.29 a barrel during the quarter as against $3.74 in the same quarter last fiscal. Fall in margins, besides inventory losses, will thrust India's standalone refiners, such as MRPL and Chennai Petroleum, into the red. Private refiners Reliance Industries and Essar Oil, too, will face the heat but to a lesser extent. RIL, which had shown no fluctuations in its gross refining margins in the two preceding quarters despite fluctuating oil prices, is not expected to report any impact of the inventory loss in the December quarter as well. Brokerages have estimated RIL to post refining margins between $8.5 and $10 a barrel. Its petrochemicals business may take a hit due to fall in prices, margins and demand. ETIG's estimates put RIL's Q3 profit at Rs 2,739 crore, down 31% against the same quarter last year adjusted for profit on sale of RPL stake

Marketers
Oil marketing firms are expected to post losses in view of the lower refining margins, inventory losses and uncertainty over oil bonds. Merrill Lynch estimates the cumulative losses of Indian Oil Corporation, Bharat Petroleum and Hindustan Petroleum at Rs 8,660 crore. However, brokerages are positive on the future of the firms, which are making profits on sale of petrol and diesel. At the same time, falling crude is expected to bring down their debt. “Even at an oil price of $60 a barrel and downstream share in under-recoveries at 22% in FY10, OMCs’ earnings would be significantly positive at current product prices,” said a Motilal Oswal report.

Natural gas
The natural gas transmission companies are unlikely to post any spectacular numbers for the December quarter. India's largest gas-transmission company Gail is expected to take a hit on its petrochemical and liquid hydrocarbon business, while the transmission business is estimated to post a growth. Motilal Oswal expects a 45% fall in Gail’s Q3 profit, while Merrill Lynch pegs the fall at 14%. ETIG estimates a net profit of Rs 576 crore, which is 7% lower on a y-o-y basis. Gujarat State Petronet, Gujarat Gas and Indraprastha Gas, are expected to post flat results. RIL’s KG basin fields are likely to commence natural gas production in the March 2009 quarter, which will double the natural gas availability in India over the next two years.


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