Crude woes to hit oil cos’ June numbers

THE petroleum industry has been in the limelight for most of the last quarter, thanks to the sustained growth in crude oil prices which gained nearly 30% between April and June 2008. In the first week of June, the government allowed some increase in retail prices of petroleum products and adjusted duty structure to absorb a part of the impact of rising crude oil prices. However, this is hardly going to benefit the Indian petroleum industry, when they publish their quarterly results for the period ended June 2008.

Upstream Oil
India’s largest petroleum producer ONGC is unlikely to emerge a winner, as it needs to share a part of the subsidy. Most brokerage houses, including Prabhudas Leeladhar, Religare and CLSA, among others, expect a single-digit growth in ONGC’s net profit in the quarter ended June 2008.
High crude oil prices are likely to benefit private sector producer Cairn India in improving its quarterly profit. However, they will have little meaning, considering the fact that the company’s valuations mainly depend on its crude reserves and future production from its Rajasthan fields.

Standalone Refining
The gross refining margins (GRMs), which represent the differential between petroleum product prices and the cost of crude oil, remained strong during the June 2008 quarter due to high diesel prices, benefiting the standalone PSU refiners such as MRPL and Chennai Petroleum, besides Reliance Industries and Essar Oil in the private sector. The analyst community is expecting sterling performance from RIL, which derives nearly two-thirds of its revenues from petroleum refining business. “We expect RIL to report GRM of around $16.5/bbl,” mentions a Motilal Oswal report. Most brokerage houses are expecting RIL to turn in profit growth of 23-27%. However, weak margins in the petrochemicals business could eat into RIL’s profits. Hence, taking a cautious view, CLSA and Morgan Stanley have projected just 9-12% profit growth for RIL in Q1 FY09. Essar Oil’s refinery commissioned commercial production this quarter, which means it will start reporting profits. Similarly, companies such as MRPL and Chennai Petroleum would report healthy results in the quarter.

Refining and Marketing
India’s state-owned oil marketing companies — Indian Oil, BPCL and HPCL — continue to suffer from under-recoveries and their profitability will remain unpredictable till the timing and quantum of oil bonds are known. “For the past two years, the government did not issue any oil bonds in the first quarter. It issued oil bonds in the second quarter for both first and second quarters,” noted the Motilal Oswal report. As a result, most brokerage firms expect the losses of OMCs to widen. CLSA mentions, “We expect the R&Ms to report aggregate losses of Rs 24,000 crore despite higher refining margins and inventory gains due to spiralling under-recoveries and lack of oil bond support." Exploration support industry
The companies providing support to petroleum companies in exploration activities are likely to post good numbers. Companies such as Aban Offshore, Shivvani Oil, Asian Oilfields and Deep Industries may turn out surprises. Morgan Stanley expects Aban’s Q1 profits to triple, while Citi’s projection is a modest 57% growth and Religare’s just 35%. Other companies in this space, such as Garware Offshore and Great Offshore, too are expected to do well.

Gas Transportation
The results of most of the gas transporters are unlikely to be exciting. India’s largest gas transporter GAIL will continue to reel under the pressure of subsidies. “While higher gas transmission volumes will allow GAIL to offset the impact of the gas price increase (which impact petchem and LPG margins), leading to a 25% Y-o-Y rise in core EBITDA, subsidy sharing is expected to double during the June 2008 quarter to Rs 550 crore. This will restrict net profit growth to a modest 2% Y-o-Y,” mentions CLSA’s report. Smaller players such as Gujarat Gas, Indraprastha Gas and Petronet LNG are likely to report profit growth of around 10%. Gujarat State Petronet could turn out to be an outperformer in this league.