Why BPCL, HPCL And IOC May Be Staring At Lower Profits In Q1

Early estimates available on Bloomberg showed that adjusted earnings per share of Indian Oil Corp. and Bharat Petroleum Corp. stood at Rs 4.38 and Rs 11.26, respectively, in the April-June period of FY22 compared with Rs 10.47 and Rs 59.77 in the preceding quarter. Forecasts for Hindustan Petroleum Corp. weren’t available.

Year-on-year, however, the bottom line of oil marketers is seen expanding, aided by a low base as the nationwide lockdown to curb the first wave of the pandemic disrupted businesses.

Usually, a rise in crude prices leads to inventory gains for oil retailers as they buy cheaper inventory and sell at a higher price. But this time, even as Brent crude has risen 9% over the fourth quarter to average at $67.1 a barrel so far in the April-June period, it’s still less than the 36.1% jump seen in the preceding three months. Higher inventory gains in the fourth quarter were one of the reasons for a surge in oil marketers’ profit.

Bloomberg estimates for Brent average around $69.4 per barrel in the first quarter of FY22. The benchmark oil prices have been rising on a likely delay in lifting of Iran sanctions.

Besides, retail fuel prices hovering at Rs 100 a litre in several cities and falling consumption of petroleum products are adding to the woes of the companies. And offsetting the optimism around the Covid-19 vaccination and summer demand from the U.S. and Europe.

Demand for diesel and petrol, which account for more than half of oil consumption in India, have fallen by a third so far in May compared with pre-virus levels two years earlier, according to a Bloomberg report, because of fresh localised lockdowns to curtail the resurgence in Covid-19 infections. Jet fuel consumption during the period slumped 61%. While that’s not as bad as April 2020 because more factories remained opened and cargo movement wasn’t badly affected, chairman at Indian Oil—the nation’s largest oil refiner—told Bloomberg that it’s difficult to predict when normalcy would return.

That, the state-run refiners indicated in post Q4 conference calls, prompted them to pare their refinery run rates in May. While Indian Oil reduced its refinery utilisation rate from 100.12% in March to 84% in the first fortnight of May, BPCL lowered it from 118% to 86% during the period.

Cracks for middle distillate—a general classification of refined petroleum products including diesel, jet fuel and kerosene— improved $1-1.5 a barrel despite a drop in petrol and LPG cracks. Fuel oil cracks—gap between the price of a barrel of crude and a similar quantity of refined product—declined $2.5 a barrel, according to an Emkay Global report.

A fall in key petroleum product cracks, coupled with the mounting Covid-19 infections and a rise in U.S. inventories in the last six weeks, is likely to hurt the companies’ refining margins—what a refiner earns by converting one barrel of crude into fuel.

That comes when the Singapore-Dubai hydrocracking GRM, according to Bloomberg data, averaged at $0.83 a barrel so far in the three months ending June, a 16.5% rise over the preceding quarter. The Asian benchmark GRM had risen 37.7% sequentially in the fourth quarter. The benchmark GRMs, a Bloomberg report said, are likely to improve further from the third quarter of calendar year 2021, assuming accelerated Covid-19 vaccination will aid demand.

Marketing margin, what oil refiners earn by selling every litre of fuel, too, are seen to decline in the quarter ending June. The companies have resumed price hikes after the recent state elections. With the global crude increasing, the oil marketers will have to raise prices further to maintain their marketing margin. There, however, is a problem: the retail fuel prices are already at record highs and any increase in rates will adversely impact sales in an already falling demand environment.

Besides, a PTI report citing an ICRA note, said that unless the central and state governments cut excise and added tax rates, state-owned oil marketers would be constrained in passing on further price hikes in the retail market, hurting marketing margin.