Falling Margins May Hurt Refiners; Explorers To Gain From Higher Crude Prices

Falling margins may hurt oil refiners while a rise in crude prices is expected to help oil and gas explorers post better earnings in the January-March quarter of the financial year 2016-17.

The Singapore gross refining margins (GRMs), the Asian benchmark of profitability for refining companies, fell in the quarter-ended March over the previous three months. This will result in lower margins and inventory losses for downstream and oil marketing companies like Reliance Industries Ltd., (RIL) Indian Oil Corporation Ltd., (IOC) and Bharat Petroleum Corporation Ltd. (BPCL).

Brent crude, which is a major benchmark for purchases of oil worldwide, averaged $54.6 a barrel during the quarter, 7 percent higher over October-December period. Higher crude prices could improve realisations of upstream companies or explorers like Oil and Natural Gas Ltd. (ONGC) and Oil India Ltd. Absence of any subsidy burden will improve performance.

GAIL India Ltd., however, will benefit from higher gas and petrochemical volumes, while Indraprastha Gas Ltd. is expected to report double-digit volume growth for the third consecutive quarter.

The seven oil and gas firms are expected to report an aggregate 6 percent decline in revenue this quarter over the previous three months. Net profit is expected to remain flat, while earnings before interest, depreciation and amortisation (EBITDA) may marginally increase by 0.6 percent, according to Bloomberg consensus estimates.

ONGC

• EBITDA is expected to rise 17 percent sequentially and 132 percent year-on-year on the back of higher crude oil prices.
• Oil and gas production is expected to rise in the range of 2-4 percent over the previous quarter.
• Crude oil realisations are expected to increase around 9 percent, quarter-on-quarter, to $54.6 per barrel.
• Guidance on capital expenditure for financial year 2017-18, commentary on oil and gas production volumes and development plans for Krishna-Godavari Basin will be key things to watch.

Oil India

• Revenues are expected to rise 7 percent, compared to the last quarter, while net profit is expected to increase by 27 percent on the back of higher crude oil prices.
• Growth is strongly led by higher crude oil realisations as the volumes are expected to remain flat over October-December. For the fourth quarter, realisations are expected to rise 7 percent to $52.8 per barrel.
• Management commentary on volume growth and capital expenditures for financial year 2017-18 will be crucial.

GAIL India

• GAIL India Ltd. is expected to continue its growth trend on the back of lower liquefied natural gas prices and higher gas transmission/trading volumes along with better petrochemical volumes.
• Net profit is expected to rise 12 percent, led by profitability in the petrochemical division and likely higher gas transmission.
• Profitability in the petrochemical and gas trading business and progress of pipeline projects will be key things to watch.

Reliance Industries

• Petrochemicals earnings are expected to drive growth as profit from the refining segment will remain subdued due to declining GRMs.
• GRM is expected to fall or remain flat
• Updates on the telecom arm Reliance Jio, downstream projects and capital expenditure for financial year 2017-18 will be watched.

Indian Oil

• Revenue, EBITDA and net profit are expected to decline on the back of lower refining and marketing margins.
• GRM is expected to fall 27 percent to $5.6 per barrel, while volumes are expected to remain flat, quarter-on-quarter.
• Management commentary on the Paradip refinery, gross refining margins and capital expenditure plans for financial year 2017-18 will be important.

BPCL

• Revenue, EBITDA and net profit are expected to decline compared to last quarter on the back of lower refining and marketing margins.
• GRM is expected to remain flat at $5.8 per barrel as compared to $5.7 per barrel in the third quarter.
• Update on the impact of inventory and forex changes, clarity on Mozambique upstream development, Brazil explorations and production blocks and expansion plans for the Kochi refinery will be key to watch.

Indraprastha Gas

• The EBITDA margin is expected to improve quarter-on quarter and year-on-year led by high volumes and lower reduction in compressed natural gas prices compared to the government-set gas prices.
• Total volumes may remain flat over to last quarter, but are expected to rise 14 percent compared to last year.
• Company’s view on expansion to newer geographies and outlook on CNG volumes and gas prices will be crucial.

(These expectations have been compiled from reports of Jefferies, PhillipCapital, Edelweiss, Motilal Oswal, ICICI Securities and Emkay.)