Oil cos may slip on subsidies, high refining costs in Q1

PETROLEUM companies, particularly oil marketers, are expected to report a fall in sales and profits when they come out with their results for the June quarter later this month in a sharp contrast to an impressive performance in the last quarter of 2008-09. Oil marketers have been selling auto fuels below cost for most part of the quarter, while refiners too are facing pressure on margins with fuel consumption falling globally. The 16% y-o-y depreciation in the value of rupee may not have made much of an advantage for domestic companies as the average crude prices during the quarter at $60 per barrel was half of the year-ago figure.

Oil marketing companies: State-run oil marketing companies, including Indian Oil, Bharat Petroleum and Hindustan Petroleum, had suffered heavily in the first quarter of 2008-09 by selling petro-products below their cost when the oil prices soared to new highs. The June 2009 quarter would be somewhat better due to substantially-lower crude prices. However, in the absence of special oil bonds from the government and a fall in the refining margins globally, the performance of these three oil majors will be subdued, but better compared to last year.

Standalone refiners: With the global demand for petro-products weakening, the refining margins have come under pressure. According to the International Energy Agency, the average benchmark Singapore gross refining margins had dipped into the negative territory in the quarter compared to $5.4 per barrel in the yearago period. Although the actual GRMs will be better than the benchmarks, this indicates weakness in the profitability of standalone refiners such as Essar Oil, Mangalore Refinery & Petrochemicals and Chennai Petroleum. Reliance Industries, which derives two-third of its revenues from petroleum refining, will, however, be able to prop up its profits due to a jump in its income from production of oil & gas. The company is expected to maintain its June 2009 quarter profits at the year-ago levels.

Petroleum producers: ONGC’s 5% lower production in the June 2009 quarter and substantially-lower crude oil prices are likely to take the country’s largest oil and gas producer’s profits down. The state-run company’s subsidy burden is estimated at around Rs 2,600 crore during the quarter, down from Rs 9,811 crore in the yearago quarter. The troubles for Cairn India’s oil production in Rajasthan are not yet over, with the company failing to commence production in the June 2009 quarter despite being ready. Natural gas companies: The natural gas transmission companies such as Gail, Gujarat Gas, Gujarat State Petronet (GSPL) and Indraprastha Gas are all expected to continue with their stable performances. They are expected to show a rise in volumes, thanks to the additional gas from RIL, starting April 2009. Petronet LNG has commissioned a project to double its LNG import capacity to 10 million tonne per annum towards the end of the quarter.

Better tomorrow: The second quarter of FY10 is expected to be better for the industry in comparison to the June quarter. The hike in petrol and diesel prices starting July will cut down the marketing losses of oil marketers and will perhaps help them report profits for the September quarter. If under-recoveries come down, the subsidy burden on ONGC too would ease a little. In the private sector, RIL-RPL merger and commissioning of Cairn’s oil production from Rajasthan will boost their earnings.