PETROLEUM SECTOR: Crude Fall Offers Comfort, but Re Remains a Worry

India’s petroleum industry is expected to see weak numbers for the June ’12 quarter as industry’s under-recoveries remain high while refinery margins are under pressure due to economic weakness in major consumer economies. Crude oil prices, which had peaked at $125 a barrel in March, cooled off through the June ’12 quarter, touching a bottom of around $90. However, the rupee depreciation through these months to a record low below 57 against the US dollar has limited the benefit of this fall. As domestic diesel prices, LPG and kerosene remain unchanged, the under-recoveries for the quarter will surpass . 40,000 crore. ONGC’s performance could get a booster since historically the upstream share of its under-recovery burden is calculated at 33% in initial quarters. This could restrict ONGC’s burden to around . 10,500 crore for the quarter. BRICS Securities estimates the oil major’s net oil price realisation at $56 a barrel, which will boost its net profit 61% YoY to . 6,600 crore.
“These numbers, which correspond to around 33% upstream share in under-recoveries, are unlikely to prevail throughout the financial year since the government may increase the upstream subsidy share later,” said the sectoral earnings preview report by BRICS Securities.
Production ramp-up to 175,000 bpd is set to help Cairn India’s numbers. The performance of OMCs will depend on upstream discounts and government support. 
Standalone refiners may face pressures on refining margins since differential between crude oil and final product prices remained narrow. “RIL’s gross refinery margins should fall 32% YoY and 10% QoQ to $7 a barrel on lower product spread,” said the BRICS report.
The natural gas industry is likely to face stagnation with the domestic production slipping steadily. Gas transmission companies such as GAIL, Gujarat State Petronet and Gujarat Gas should find it difficult to show revenues and profit growth on stagnant volumes. The industry also continues to suffer from regulatory uncertainties over marketing tariffs.
India’s oil & gas sector’s problems are far from over since the government feels obliged to sell fuels at discounted prices. The gas industry’s woes over dwindling availability will continue. The decision-making at the government level remains slow and uncertain. In fact, some MNCs are already seen exiting their Indian ventures. This underlines the unattractiveness of the entire industry for retail investors.