Huge under-recoveries may dent oil cos’ margins

ONGC, Oil India Profit To Take A Hit, But Cairn, RIL May Put Up Strong Show

ALTHOUGH the first quarter of FY11 was marked by a number of positive developments for the Indian petroleum industry, their impact on the first quarter numbers will be muted. Higher levels of under-recoveries are expected to impact the industry performance down in this quarter. However, the sector offers several investment opportunities, and investors need to wait for dips to invest.
The profits of state-run oil producers are expected to remain under pressure in the June 2010 quarter. Of the estimated Rs 18,000 crore of under-recoveries for the quarter, ONGC’s share is expected at Rs 5,100 crore — several times larger than the Rs 429 crore it had to bear in the June 2009 quarter. With the net realised oil price poised to fall below last year’s and stagnating production, ONGC’s standalone profits could fall on a y-o-y basis. Various brokerages have estimated a fall of close to 28-30% in ONGC’s profits for the June quarter. Apart from a higher subsidy burden, Oil India’s profits will also take a hit from the 100-day shutdown of Numaligarh refinery, which is its key customer. Oil India’s production had to be curtailed during the quarter, resulting in a millionbarrel production loss.
E&P player Cairn India is, however, set to post a huge jump in profits as it commissioned its pipeline and increased the production level. “Having its Rajasthan output ramped up to 60,000 bpd, we expect Cairn to report a strong quarter with an average production at 45-50 kbpd in June 2010 quarter, up from 17.5 kbpd in March ’10 quarter,” says Alok Deshpande of Elara Securities. Cairn is expected to post a net profit of over Rs 400 crore.
RIL’s profits are expected to be far stronger than the year-ago numbers aided by higher gas volumes and doubled refinery volumes, as the petrochemicals segment starts witnessing margin pressure. Sharekhan’s results’ preview note mentioned a higher fall in petrochemical prices compared to its raw material naphtha, which would result in a margin pressure. Most analysts have pegged RIL’s profit growth at 24-30%. The other refinery companies are expected to take a hit due to weak refining margins. “With the increase in refinery utilisation rates, gasoline and naphtha cracks came under pressure, bringing June ’10 quarter’s gross refining margins below $4/bbl,” noted the results’ preview report of Motilal Oswal. This is expected to weigh heavily on the numbers announced by Chennai Petroleum, Essar Oil and Mangalore Refinery.
Although the government decided to revise petroproduct prices upwards, the announcement came at the fag end of the quarter. As a result, the downstream marketing companies will face the brunt of under-recoveries estimated at close to Rs 18,000 crore for the quarter. Of this a burden of close to Rs 2,500-3,000 crore is set to fall on three oil marketing companies — Indian Oil, BPCL and HPCL. The net profit of all these companies could be lower by 60-70% when they announce their quarterly numbers later this month.
While its subsidy burden is sure to rise, the largest gas transporter Gail is set to benefit from the revision in the APM gas prices, which now leaves it in a position to book marketing margins. At the same time, higher gas output from KG basin as well as higher volumes from Petronet LNG’s expanded capacities will result in a jump in the volumes transported during the quarter. Analysts are expecting the company’s profits to jump 20-40% against the year-ago period.
The overall subsidy burden for FY11 is likely to be substantially lower than estimated at the beginning of the year. This will enable public sector oil companies to report better numbers in the coming nine months.
With oil prices expected to remain rangebound, the performance of E&P companies will remain stable. Cairn India should show continuous profit growth till mid-FY12, when its production from the Rajasthan fields plateau. RIL’s numbers will have little upside surprises in the next couple of quarters, although it will continue to report profit growth. Gail’s profitability is likely to remain higher in the coming quarters as the increase in its pipeline capacity translates into higher revenues. Investors must watch stock movements closely to identify good buying opportunities in each of these stocks for long-term gains.