Q2 Review: This Weighed On Oil Marketers In Second Quarter

A weaker-than-expected refining business marred the performance of India’s three listed oil marketers in the quarter ended September.

Operating income from the refining segment fell sequentially for Bharat Petroleum Corporation Ltd. and Hindustan Petroleum Corporation Ltd., while it turned negative for Indian Oil Corporation Ltd., according to data compiled by BloombergQuint.

That’s because refining margin, or what oil marketing companies earn for processing every barrel of crude into fuel, fell on account of losses or lower gains on inventory as crude prices declined during the quarter. Indian Oil was the worst hit among peers as India’s largest oil retailer incurred a huge inventory loss.

Usually, a fall in crude leads to an inventory loss as oil marketing companies that bought stock at higher rates may have to sell through retail outlets at lower prices. And Brent crude averaged lower in the second quarter at $62.12 a barrel as production rose and global demand fell.

Still, the Singapore gross refining margin, or the Asian benchmark, jumped 86 percent over the previous quarter—the most in at least eight years—to average around $6.5 a barrel in the three months ended September.

Debt Burden

The debt of all state-owned oil marketers rose in the second quarter as capital expenditure increased.

The combined debt rose 15 percent over last quarter to Rs 1,41,897 crore. BPCL’s debt was the largest ever, while HPCL’s jumped to its highest in more than seven years.

How’s The Third Quarter Shaping Up

Weakness in the refining segment is expected to continue in the quarter ending December.

The Singapore gross refining margin has dropped 38 percent sequentially so far in the ongoing three-month period—the most in 21 quarters—to around $4 a barrel. A lower gross refining margin means refiners would earn less for processing every barrel of crude.

The fall in gross refining margin may be attributed to a rise in freight rates.

On Sept. 25, the U.S. imposed sanctions on two state-owned Chinese crude shipping companies—Cosco Shipping Tanker (Dalian) Co. Ltd. and Cosco Shipping Tanker (Dalian) Seaman & Ship Management Co. This forced oil traders to replace tankers of companies facing sanctions, leading to a surge in freight rates on crude.

Besides, Brent Crude has averaged at $60.17 a barrel so far in the quarter ending December against $62.12 per barrel in the preceding three months. And that lead to an inventory loss for oil marketers for a second straight quarter.

The gross marketing margin—the mark-up earned on sale of every litre of petrol and diesel—is stable so far during the ongoing quarter. That’s expected to benefit HPCL and BPCL the most as retail sale of fuel, according to BloombergQuint’s calculations, contributes nearly 60 percent and 40 percent, respectively, to their operational profit.

But if consumption of petroleum products falls further, the marketing segment could be impacted.

Watch | Fuel retailers have little to chear about in Q2