The quarter to March 31, 2012 was characterised by rising crude oil prices which, in the absence of retail price hikes, sent the under-recoveries of state-owned oil firms soaring. Private sector companies had their own set of woes, including margin pressure. Several firms increased refining capacity, while most natural gas companies are likely to witness stagnancy due to shortage of gas.
UNDER-RECOVERY PROBLEM The benchmark Brent crude oil prices rose 9% from the December 2011 quarter to about an average $119.6 per barrel in the March 2012 quarter. In the absence of any revisions in the prices of petrol, diesel, LPG and kerosene, the sector’s under-recoveries are set to range between . 41,000 and . 43,000 crore in the quarter, against an average of . 32,438 crore in the three previous quarters.
As a result, the profitability of the oil PSUs will depend directly on the government’s subsidy payments. The petroleum ministry has sought . 40,000 crore from the finance ministry towards the final subsidy for FY12, which, if accepted, will boost the final quarter numbers of Indian Oil, BPCL and HPCL and help them close the year in the black. ONGC, Oil India and Gail could also see their last quarter subsidy burden easing from the previous quarter.
PETROLEUM REFINERS Petroleum refiners such as Reliance Industries, Essar Oil, MRPL and Chennai Petroleum are expected to see margin pressures due to high crude oil prices. “For RIL, we factor in lower GRMs for Y-o-Y and Q-o-Q at $6.6 per barrel, on the back of a decline in diesel and lightheavy crude oil differential. Difference between Dubai and Arab Heavy has turned negative during the quarter, effectively leading to higher crude cost for RIL,” a result preview report by Emkay said. Petrochemical margins have also come down from the preceding quarter, which will weigh on the performance of Reliance Industries. “We expect a 10.9% Q-o-Q decline in petrochemicals EBIT,” according to an Edelweiss report.
UPSTREAM OIL COMPANIES Cairn India is likely to post substantially better numbers helped by the rise in crude oil prices and commissioning of the 40,000 barrels-per-day production unit at Bhagyam mid-January. ONGC’s profit will depend on the subsidy it pays. Analysts expect the subsidy bill to range between . 11,500 crore and . 15,400 crore, which puts the net profit figure between . 2,200 crore and . 4,500 crore. The increase in cess on crude oil in the recent budget will add to the cost of these companies.
NATURAL GAS At a time when falling KG-D6 production is creating a volume shortage in the natural gas industry, imported LNG is becoming more acceptable. Thus, some companies are set to do well, while others face stagnancy. “The natural gas universe is likely to report revenue and profit growth of 33.5% and 3.9% Y-o-Y, respectively, primarily driven by higher realisation from Petronet LNG, Indraprastha Gas and Gujarat Gas,” said the Emkay report.
OUTLOOK The outlook for the petroleum industry isn’t rosy, particularly with no solution in sight for under-recoveries. Global crude prices may not cool off in a hurry, which means oil PSUs will continue to face subsidy-related problems. The margin pressure for the refining industry is likely to continue as crude prices stay high and demand for fuels remains subdued. Capacity closures in Europe and the US could give a positive impetus for this sector. Among the gas companies, Petronet LNG and city gas players will continue to do well, while Gail faces volume stagnation.
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