Petro majors likely to put out better numbers in Q2

But Outlook Remains Sombre As Cos May Face Margin Pressure, Going Ahead

THE Indian petroleum industry — especially the refiners and natural gas players — is expected to report some very good numbers for the September 2009 quarter results later this month.
The refiners, who suffered heavily from the crash in oil prices in the corresponding quarter last year, are likely to post a strong turnaround, while the rising availability of natural gas bodes well for pipeline players. Still the outlook remains sombre. The refining and petrochemical industries are likely to face margin pressure in the coming quarters. This will raise questions on their profit growth, even as the uncertainty over under-recoveries and subsidy-sharing remains.
The three oil marketing companies, which had jointly incurred losses running up to close to Rs 12,900 crore in the year ago period, are likely to emerge as the only strong gainers on a year-onyear (y-o-y) basis in the September 2009 quarter. Stability in crude oil prices, revised retail prices of auto fuels starting July and a steadily strengthening rupee are likely to help IndianOil, Bharat Petroleum and Hindustan Petroleum in posting healthy profits. Analysts peg the trio’s total profits for the quarter in the Rs 2,500 to Rs 4,500-crore range, based on assumptions for oil bonds.
The volatility in crude oil prices last year had impacted their profitability substantially.
The refining environment continued to weaken during the quarter ended September 2009 from the June 2009 quarter due to a global oversupply of refined products. This is expected to reflect in a sequential weakening of gross refining margins (GRMs) for the domestic standalone refiners including Mangalore Refineries, Chennai Petroleum and also private sector majors Reliance Industries (RIL) and Essar Oil. However, the sequential weakness may not result in a y-o-y fall in GRMs for these companies, thanks to the reduced crude oil volatility this year. GRMs represent the pricing differential between refined products and the crude oil required to produce them.
However, analysts expect a significant fall in the case of Reliance Industries, which had not witnessed any fluctuations in GRMs despite the oil price turbulence last year. The company, which posted over 50% y-o-y drop in GRMs in the June quarter to $7.5 per barrel, could see its GRMs weakening further in the September 2009 quarter to somewhere between $6.6 and $7.4 per barrel, which could very well turn out to be one of its lowest GRMs historically.
RIL’s petrochemical business, which comprised nearly half of the company’s June 2009 profits, is likely to witness margin pressure. Its earnings from natural gas production will add significantly to the profits. However, the analysts expect the company to report a y-o-y fall in net profit from operations. The company’s sale of treasury shares during the quarter that helped it raise Rs 3,188 crore will boost RIL’s other income and also the reported profit figure for the quarter.
ONGC’s performance during the quarter will depend on the amount of subsidy burden. In the preceding June 2009 quarter, its net realised price was 15.7% lower on y-o-y basis despite the negligible subsidy burden. However, the September 2009 quarter may see the company getting a better price for its crude oil compared to $46.7 per barrel that it got in the year-ago period. The downward trend in the company’s oil production is likely to continue with an around 3% fall. The analyst projections for the company’s September 2009 profit growth range from a fall of 11.9% to a growth of 26%.
Cairn India, which commenced production from its Barmer field by end August 2009, is unlikely to see any major revenues from the same, as its pipeline network is yet to be completed. The revenues and profits from the Ravva field operations will see a y-o-y fall due to lower oil prices.
The natural gas transporters are likely to see better revenues from the spurt in the domestic availability of gas. Gujarat State Petronet (GSPL) is likely to post a similar profit growth in the September 2009 quarter as it posted in the June 2009 quarter.
Gail’s profitability is, however, expected to come under pressure due to higher subsidy burden and its ongoing expenditure on petroleum exploration initiatives, which stood at a cumulative Rs 260 crore in the three preceding quarters. Gail’s profit is likely to fall between 21% and 45% from the year-ago period.
Going forward, the outlook for the refining business continues to remain weak, while the petrochemicals too will face increasing margin pressure due to commissioning of new capacities. The uncertainties over subsidy sharing and oil bonds will continue to obscure the future of public sector companies. The natural gas industry is expected to continue growing in line with the growing domestic availability.