Q1 Preview: Weak Marketing Margins, Low Demand To Offset Refining Gains For HPCL, BPCL And IOC

Brent crude jumped 13% sequentially in the first quarter and the benchmark Singapore gross refining margin, a measure of what an oil firm earns for processing a barrel of crude, rose 16.7%.

While product crack spreads—or the price difference between petroleum products and crude oil input—for petrol, diesel and jet oil rose sequentially in the first quarter, it fell for LPG, fuel and naphtha.

Falling spreads lead to a decline in core GRMs of refineries and vice versa.

Brokerages expect rising crude oil prices to result in inventory gains for oil marketers.

ICICI Securities pegs it at $1.11-$2.8 a barrel for the quarter ended June. “Crude inventory gain is likely for OMCs given the cost of closing crude inventory may be higher than opening and there was an almost secular rise in crude price during the quarter,” it said in a report.

But Emkay Global expects higher prices to also result in higher “fuel and losses”— running costs of refinery and fuel losses in the system. That could adversely impact the GRMs.

Moreover, the pandemic’s second wave dented fuel sales in April and May. Overall demand for petroleum products fell 10.4% sequentially in the first quarter, according to data from Petroleum Planning and Analysis Cell.

All petroleum fuels witnessed a sequential decline in demand with aviation turbine fuel falling the most by over a third. Consumption of petrol and diesel contracted 13.2% and 10.5%, respectively.

As a result, crude throughput, or the amount of crude oil processed by refineries, also contracted in April and May by 5.2% and 4.6%, respectively, according to a Motilal Oswal report. There was also a partial shutdown by Hindustan Petroleum Corp. because of its Mumbai refinery expansion and an unplanned shutdown at Reliance Industries Ltd.’s Jamnagar unit in June, the brokerage said.

Retail prices haven't kept pace with crude surge, and that's expected to impact quarterly marketing margins.

While the Brent jumped 16% during in the first quarter, petrol price rose 9.1% and diesel turned costlier by 10.3%.

Gross marketing margins, according to Motilal Oswal, trended lower at Rs 4 a litre in April-June from Rs 6 in the preceding three months.

ICICI Securities estimates average net marketing margins—that strip out energy and and fixed costs—at Rs 1.4 per litre in the first quarter, a 77% drop year-on-year.

While net margins tumbled to Rs 0.7 and Rs 0.48 a litre in April and May, they rebounded to Rs 3.15 per litre in June, the brokerage said. That helped the average to rebound from January-March's Rs 1.2—the lowest level in 10 quarters.

Analyst Views

Motilal Oswal On Marketing Sales Volume:

• HPCL: Likely to contract 20% over the previous quarter to 8.1 million metric tonnes because of the second Covid wave.

• BPCL: Estimated to contract 20% to 8.9 MMT.

• Indian Oil: Seen contracting 11% at 16.4 MMT.

ICICI Securities Estimates On Inventory Gains

• HPCL: $2 a barrel.

• BPCL: $1.1 a barrel.

• IOC: $2.8 a barrel

Overall Performance

• Yes Securities said HPCL, BPCL, and IOC are likely to report weak earnings sequentially as the covid-19 lockdown led to a decline in fuel sales coupled with relatively weaker marketing margins.

• Emkay report estimates net profit of of IOCL/BPCL/HPCL to decline 60%/59%/43% sequentially to Rs 3,900 crore/Rs 1,600 crore/Rs 1,700 crore in Q1FY22.