PETROLEUM: Upstream Oil Producers to Gain, OMCs may Reel

For India’s petroleum industry, the performance in the quarter to December could well be a mixed bag. Upstream oil producers will benefit from high crude oil prices coupled with a weak rupee.
Pressure on refining margins will spoil the show for midstream refiners. The performance of downstream marketers will hinge on whether and how much the government compensates them for selling fuel below cost. The natural gas industry is expected to continue its steady pace as domestic availability of gas remains tight.
The upstream oil majors — ONGC, Oil India and Cairn India — will see higher realisations as the average rupee-dollar rate was 50.88 for the December 2011 quarter, down 13.5% compared with the yearago period. ONGC and Oil India will have to face uncertainties related to subsidy sharing, but are still likely to emerge as winners. The one-time income of . 2,500 crore on recovery of royalty on the Rajasthan fields will also boost ONGC’s numbers.
The performance of standalone refiners such as MRPL and Chennai Petroleum, including private sector players such as Reliance Industries and Essar Oil, will be under pressure due to lower gross refining margins, or GRM. During the December 2011 quarter, Reuters’ Singapore benchmark GRM dipped to its lowest in FY12 at $7.9 per barrel. Reliance Industries, in particular, is likely to see a sizeable margin erosion due to a fall in the light-heavy crude price differential. Essar Oil is expected to post another quarterly loss on adverse foreign exchange movement.
As retail prices remain below cost, the three oil marketing companies — Indian Oil, BPCL and HPCL — are likely to post under-recoveries in excess of . 30,000 crore for the December 2011 quarter. In view of the state of government finances, we expect only the minimum compensation to be given in FY12. This may, however, prop up OMCs’ earnings in Q3.
India’s natural gas industry is unlikely to see any significant positives with gas volumes staying more or less stagnant. Gail’s performance will depend on its ability to combat margin pressure in the petrochemicals business, as well as its subsidy burden. Petronet LNG is expected to do better compared to transporters such as Gujarat Gas, GSPL or Indraprastha Gas.